Why unit economics are so important for your startup

 Financial statements usually don't give you the best "picture" that a startup is financially healthy in its early stages. This is why the unit economics analysis is used as an alternative to being able to analyze if it is going to have financial health in the future.

 The unit economics are the direct revenues and costs associated with a particular business model expressed per unit. They are vital at all stages of a startup's development, but for certain circumstances such as raising capital from investors, they are most relevant, as all of them will be very interested in seeing that you control your numbers and that your business will earn money per transaction, hence the importance of estimating them, even before having real clients. If you predict that you will lose money per transaction, it is likely that you will not get investment. Early-stage companies need to analyze their businesses at a more granular level. Founders need to know how much value they can capture at a level per unit therefore, we present some data that will allow you to analyze whether your business model is viable or not.

 The most relevant unit economics are 1) Customer Life Time Value (CLTV): that is, how much money each customer brings to the company from the moment it is acquired until the moment it stops buying and 2) Cost of Customer Acquisition (CAC): how much does it cost to bring a new customer to the company including costs of the sales force, marketing, etc.

 For example, in the SaaS industry CLTV and CAC matter that there is a positive relationship. That is, the CLTV must be greater than the CAC, at least 3:1. If you have it, it is more likely that with a greater mass of clients you will have a greater capacity to cover your fixed costs (without increasing them) and generate better profit margins.

It is very important to let you know that your unit economics are aligned to the break-even point, since they will let you know when to reach it and, therefore, that you are profitable and attractive to an investor.

We analyze the performance of a company based on its unit economics as part of our methodology to be able to implement strategies since at the stage they are in, the financial statements are not necessarily going to give us any important fact that speaks about the positive health of your startup.

 If you have a company with these characteristics and you are in the early stage, we recommend that you be clear about the cost of acquiring a user and serving them, making an analysis with estimates of the industry in which you participate.

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