The Game of Unit Economics: Playing to Win
Unit economics might seem like a subject only accountants would love, but it’s actually a high-stakes game that every business plays, whether they realise it or not. Just like any sports game, there’s strategy, players, rules, and scores. Let’s dive into the thrilling world of unit economics and take a playful look at its various KPIs, comparing each to sports. We promise not to get too “technical” with fouls! ๐
๐ 1. Customer Acquisition Cost (CAC) – The Draft Pick Just like picking a player in the draft, acquiring customers costs money. Some are star players who come with a hefty price tag, while others are hidden gems. The key is to find the right balance between the two. Draft too many expensive stars, and you might not have enough left for the rest of the team.
๐พ 2. Lifetime Value (LTV) – The Tennis Rally Think of LTV like a tennis rally. The longer it goes on, the more value it brings to the audience. If your customers stick around, buying again and again, that rally keeps going, bringing in more and more revenue. Just be careful not to let the ball hit the net!
๐ 3. LTV/CAC Ratio – The Cricket Score In cricket, a high score is good, but only if you’re batting. When it comes to the LTV/CAC ratio, you want this score to be high as well. A high LTV/CAC ratio means you’re making more over the customer’s life than you spent acquiring them. Score a century, and you’re on your way to a winning game!
๐ 4. Contribution Margin – The Basketball Dunk A slam dunk in basketball is a showstopper, and so is a high contribution margin in business. It shows you’re not only scoring points (revenue) but doing it with style (profit). Just remember, no one likes a ball hog, so spread the love around your business.
๐ฟ 5. Payback Period – The Ski Slope Imagine sliding down a smooth ski slope, and the payback period is how quickly you reach the bottom. You want a short payback period – the quicker you recoup your customer acquisition cost, the sooner you’re back on the lift for another fun ride.
A high LTV/CAC ratio means you’re making more over the customer’s life than you spent acquiring them.
The finish line
DO:
โ๏ธ Understand each KPI and how they relate to one another.
โ๏ธ Continuously monitor and adjust your strategy.
โ๏ธ Keep a balance between acquiring new customers and retaining existing ones.
DON’T:
โ๏ธ Ignore any red flags in your KPIs; they might be the penalty that costs you the game.
โ๏ธ Put all your resources into one area; remember, even Michael Jordan needed a team.
โ๏ธ Forget to celebrate the wins; it’s not just about scoring; it’s about enjoying the game!
Ready to Get in the Game?
Here at Formidable Minds, we’ve got the coaching playbook to help you master the game of unit economics. With the right strategy and understanding of these critical KPIs, you’ll be on your way to winning the championship of business growth.