hello world

Step 2: Unit Economics -
Add Revenue Related Costs

To answer the question unit economics work - If CLTV >> CAC?" -  learn how to add revenue-related cost which include

  • Cost of Goods Sold - the cost to produce for, deliver to and support existing customers. 
  •  Cost of Customer Acquitions - the cost to acquire new customers incl
  • Cost of Selling
  • Cost of Marketing
  • Cost per Lead
Lean-Case Question 2

For all the cost types, you have 4 options to enter them

  • Time-based cost, e.g. minimum hosting cost which can be $1,000 per month growing at 2% on a monthly basis.
  • Volume-based cost which occur once - e.g. $100 to onboard each new customer. They occur once, per every new customer in the Basic revenue stream.
  • Volume-based cost which occur monthly - e.g. $10 as a customer service charge for each existing customer at the end of the month.
  • Percent-based cost - e.g. payment cost as a percentage of revenues or 
  • One-Time or irregular Expenses  - you can simply add an Expense Item by creating, uploading and/or editing a data series.

Business Plan - Assumptions Revenue-Related Cost

Model Cost

As described above, revenue related costs cover the Cost of Customer Acquisition consisting of Cost of Selling, Cost of Marketing, Cost of Leads and the Cost of Goods Sold to produce for, deliver to and support existing customers. 

Add Cost of Goods Sold (COGS)

We start with Cost of Good Sold which are all the cost to keep your existing customers running. For example, COGS are:

  • Time-based cost, e.g. minimum hosting cost which can be $1,000 per month growing at 2% on a monthly basis.
  • Volume-based cost which occur once - e.g. $100 to onboard each new customer. They occur once, per every new customer in the Basic revenue stream.
  • Volume-based cost which occur monthly - e.g. $10 as a customer service charge for each existing customer at the end of the month.
  • Percent-based cost - e.g. payment cost as a percentage of revenues or 
  • One-Time or irregular Expenses  - you can simply add an Expense Item by creating, uploading and/or editing a data series.
Revenue Related Cost

But what happens if you don’t know all that data?


You can also check our benchmarks by clicking the benchmark icons. 

Benchmarkicon

These are context sensitive. I.e. that clicking the benchmark icon under COGS gives you COGS related benchmarks. Here – for example – you find a benchmark regarding the average gross margin by different revenue types. 

Benchmarkd GM

You learn that the average gross margin for SaaS revenues is about 80% (in turn that means that COGS are about 20%) and that the average gross margin for professional services is much much lower.

Going back to Lean-Case, we  now assume COGS of 20% of revenues and enter them for both revenue streams, Basic and Enterprise (see screen above).  



Add Cost of Selling (CoS)

Next, let’s go the Cost of Selling. Remember the business goes to market with an Inside Sales Teams converting the Signups into Customers. 

This is why we have to enter cost for this Sales Team in the Rev Stream Basic Customers.

Let’s assume the annual cost per sales team is $60,000. Typically, the Sales Target of a Sales Rep must be at least 4-6 times the salary cost which would correspond between $240k and $300k in terms of Annual Bookings.


At at annual contract value of $6k, this would require between 40-60 New Deals per Year and Sales Rep.


Let's assume a Sales target of 4 New Deals deals per month, then Selling Cost per deal is monthly salary of $5,000 divided by 4 new deals per months which eaquals $1,250. 


On top of the Marketing Cost of $5,000 per Basic Customers, this increases the CAC to $6,250.

Business Plan - Explaining CAC

Training3

Let's add these cost of $ 1,250 per new customer to the tab "Cost of Selling" as volume driven cost per new customer.

COS1250


In addition, we assume Customer Service Charges of $50 per for Enterprise Customers. Let's add this cost item to the tab "Cost of Selling" in the Enterprise Revenue Stream as volume driven cost per existing customer.

COS50

Check Lifetime Metrics 

After entering all revenue related costs, we can now check the unit economics and answer if CLTV > CAC. We can still calculate them "manually" if we just consider the Basic revenue stream.

  • Average Lifetime Value in months is calculated by dividing 100% by the average monthly churn rate which is 2% 
  • Customer Lifetime Value is calculated by multiplying the Average Monthly Revenue by the Gross Margin in % and the Lifetime in Months

Business Plan - Explaining Customer Lifetime Value

model_lifetime

Having calculated CAC, the average Lifetime of a customer and the Lifetime Value, we can now calculate 2 key ratios to determine the unit economics:

  • The long-term indicator LTV/CAC shows how many times the LTV exceeds the CAC (ideally a ratio greater than three)
  • The short-term indicator Months to Recover CAC (aka: CAC Payback) defines how fast you recover the CAC (ideally faster than 12 months).
KM_Benchmarks

Business Plan - Explaining Unit Economics: Key Metrics

model_Viability


Now let's see how we can check these indicators in Lean-Case.


Go to Revenues > Manage and select the tab "Customer Lifetime Metrics" . You'll find 2 filters to select the revenue stream for which you want to calculate unit economics

  • In the first filter, Lean-Case by default selects all revenue streams which carry revenues and for which you want to evaluate the unit economics.
  • In the second filter, Lean-Case by default selects all funnel revenue streams which carry cost related to the primary revenue streams but no revenues.

To verify the results which we calculated manually, let’s pick the revenue stream “Basic” as the primary one to check its unit economics and select the funnel streams "Signups" and "Trials" which have an impact on the Cost of Customer Acquisition of the Basic Customers.

Let's also select the second year of the project which in this case is 2021 to check the unit economics. Why? Because in the first year we accrue CAC already in the first month but only start signing up customers in the second half of the year. This results in higher cost to acquire a customer in the first year.

Dashboard1

Let's first take a look to understand the key metrics on the right side of the screen. 

  • Customer Acqisition Cost (CAC)
  • Customer Lifetime Value (CLTV)
  • Annualized Customer Lifetime Value and
  • Customer Lifetime (CTL) in Months
Dashboard3

Let's go one by one:

Cost of Customer Acquisition


First of all, let’s check the cost of customer acquisition which we have calculated to be $6,250. Magic! Our calculated number matches the Lean-Case calculation.


calc_cac

Customer Lifetime in Months


Secondly, we see a lifetime of 50 months which corresponds to a monthly churn rate of 2%


KM_LT

Customer Lifetime Value


Third, you can find the Lifetime value  of $20,000 which multiplies the Gross Margin, the Customer Lifetime in Months and the average monthly revenue (often referred to as ARPA - Average Revenue per Account) . 


KM_CLTV

Annualized Customer Lifetime Value


Third, you can find the Annualized Customer Lifetime Value which is the amount of the Customer Lifetime Value generated in 1 year.


KM_ALTV


Now, we have all the ingredients to calculate the unit economics for the Revenue stream "Basic".

Dashboard4

LTV/CAC Ratio


LTV/CAC Ratio. It is a long-term indicator which shows how many times the LTV exceeds the CAC (for SaaS B2B businesses this should ideally be greater than three) and because it is just around 3 this traffic light indicator signals a yellow flag.


KM_LTVCAC

Months to Recover CAC (CAC Payback)


Months to Recover CAC – is the short-term indicator which defines how fast you recover the CAC. For a SaaS B2B this should ideally be faster than 12 months and because this is much larger, the traffic light shows a red flag. 


KM_CAC PAYBACK



Answer Question 2: Is your business viable?

After all these calculations, we can now answer if our business is viable.


And, of course we can do this in a much more complex way than just calculating the unit economics for 1 revenue stream.


For our example project, what's relevant is to understand, is what the combined unit economics of the Basic and Enterprise revenue stream are.


Showing you a formula for this or doing this in Excel is no longer a simple exericse. In Lean-Case, just add the revenue stream "Enterprise" to the filter and check the result. We can see that unit economics become much better and the LTV/CAC ration turns green.


This is evident, right?


By upselling, we replace a Basic customer with an Enterprise customer which has higher average revenues.

Dashboard5

Isn’t this nice!


We haven’t even been spending 20 minutes to put the assumptions together but already have real good insights – and we haven’t discussed a single excel formula.

For now, we have finished the revenue side also addressing the second business question of Business Viability. 


Let’s now address the third and fourth question of Business Profitability and Cash-Flow Required by adding headcounts and expenses.















>