in digital business, the metrics Corresponding to traffic, the number of users, visits or followers lose importance to the real question: How much do such metrics contribute to business growth in terms of turnover or profitability? For the novice entrepreneur, it is vital to know how to differentiate these concepts in order to identify the keys and promote the monetization of the business project.
It is a fact. At the rate that digital businesses mature, the evaluation codes of new businesses by investors or potential partners mature. For investors, they become more important real indicators of the business, the variables that represent the behavior of the operation, to qualify the risks involved in injecting new funds into the project.
Such indicators, associated with the unit performance of the business, are called unit economics or unit economy. And from the outset they must be differentiated from the usual traditional traffic metrics in the digital marketing of websites, followers or . These are the metrics that are neural to take the pulse of an operation and that are complemented by others that we have already talked about before, like when we explained
Unit economics: four essential metrics
1. Contribution margin
For experts in business economics, a classic concept to identify the health of a business operation is that of contribution margin. We arrive at this indicator after subtracting from the final sale price of our product the variable costs associated with its placing on the market.
Variable costs are costs that change depending on the units that are produced and/or placed for sale. Thus, electricity can be seen as a variable cost if, in the management of the business, its price varies depending on the units produced or the sales generated. Otherwise it is a fixed cost that does not impact performance.
How do we calculate the contribution margin?
- Identify the price at which your company sells the product units individually. Suppose we are an online accessories store and we sell accessories at a price of 7 euros each unit.
- Separate variable costs for the period covered from fixed costs for the same period on your expense report. Add up all the variable costs to get the total variable costs. In the example, the company has a total of 600,000 in variable costs.
- Divide the total variable costs by the number of units produced. In the example, if the company produces 300,000 accessories during the period, €600,000 divided into 300,000 units equals around €2 of unit variable costs.
- Subtracts variable cost per unit from sales per unit. So, to calculate the contribution margin per unit in our example, you subtract the €5 from the price minus the €2 in variable costs, giving us €3 in margin as a result.
2. Customer Acquisition Cost (CAC)
This unit economics summarizes the amount of investments we make to get a customer to make a transaction in our business, to formalize a sale. It is a high-impact variable in digital marketing (SEM, emaling, display) and in sales models such as sales per .
To calculate the CAC, it is necessary to divide the amounts invested in customer acquisition (advertising, promotions, SEO, SEM, etc.) by the resources that we have invested in acquiring new customers by the number of customers obtained in the specific period. If, for example, we have invested €3,000 in the last 6 months and we have obtained 300 clients, the CAC will be €10. This calculation must be done for each collection channel that we are using.
CAC = total costs of the marketing campaign / new clients obtained
3. The value of life of the customer or customer lifetime value (CLV)
The calculation of the CLV is a projection exercise through which we extract the net benefit that the company obtains during the time that the relationship with a client lastsminus the acquisition and maintenance costs of this relationship.
To calculate the lifetime value of each customer segment, it is necessary to identify three variables of data in the period to be evaluated:
- average order value or average ticket
- purchase frequency
- customer value.
To calculate the average value of the order, it is enough to divide the total amount of sales or income by the number of registered orders. As for the frequency of purchases, it is only enough to divide the same amount of total income by the number of unique customers. And as for the value of the client, to obtain it, it is necessary to multiply the average value of the purchase by the frequency of purchase.
Customer lifetime value is finally realized multiplying the value of the client by the frequency of purchase.
CLV=Customer Value x Purchase Frequency
4. Customer churn rate (CCR)
As a concept, it refers to when the relationship with the client breaks down, product of the migration or cancellation of the subscription of our clients. It is very visible in the subscription relationships of applications, software tools or content subscription.
The literature highlights that this unit economics was usually used in the freight transport sector to define the number of objects that were lost or damaged in the mobilization process, while it continues to gain validity in digital marketing, within the area of , or in the con the purpose of calculate the impact of the abandonment of our consumers.
This metric is calculated as a Variation index between the numbers of customers or users registered at the beginning and end of the observation period. Thus, the relationship would be: the number of customers at the beginning of the month minus the number of customers at the end of the month, divided by the number of customers at the end of the month by 100%. Or what is the same:
Clients at the beginning of the period – Clients at the end of the period / Clients at the end of the period *100= CCR.
Depending on the nature of the business, there are other variables that will surely stand out to the discerning eye when evaluating the unitary economies of your business, but with these basic ones you already have how to look at the economic detail of yours.
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