Growing @ 100X with Positive Unit Economics
Starting Up is hotter than ever, it is not like people in the yester years did not startup, they did, but it was called “Business” back then, now it is called “Start-Up”. People back then also got investments from outside their business, it was primarily from friends and family, banks etc and now their are Angels and Venture Capitalists.
With the rise in availability of risk capital entrepreneurs have become risk takers and these risks are not calculated risks and normally do not yield expected returns. Because of this free capital, people have forgotten to use wit while using this capital and thus growth is the only factor at the top of their mind and unit economics gets compromised. Let’s take a tour to how to maintain growth and at the same time not to compromise Unit Economics.
Please note here that most of the factors (about 80% of the useless and avoidable costs) will contribute to about 20% to your unit economics, this is as per the pareto principle.
What is Unit Economics
Unit Economics is the difference in value of the direct revenue and direct costs associated with that revenue acquisition, expressed on a per unit basis.
E.g. For an E-Commerce Company say FlipKart, the Unit economics would be expressed as difference in Life Time Value (LTV) of the customer and the cost associated with acquiring that customer.
Weird, ain’t it?
Consider SnapDeal’s Unit Economics for Instance
They consider every customer who has bought from them more than twice per month is an active customer and would contribute to an infinite LTV second time on because they don’t have to acquire that customer again. I read this somewhere, don’t really remember. It’s stupid enough.
You should note that in this example the LTV is the total revenue expected from a user which has already been acquired by the company, but in the case of e-commerce, the user needs to be acquired every time accompanying every sale (assuming people but large ticket item once every 2 years and do proper snooping on various competitor sites before making a purchase). Thus the revenue made out of that sale from that customer – the cost associated with making that sale (adword expense, facebook expense, hosting expense etc) is the unit economics of that business.
How to maintain Positive Unit Economics
The job of every entrepreneur is to ensure positive unit economics i.e. the difference of the revenue and cost of acquisition should be positive and should be large enough to have a business, which means, as long as the customer gives you more money than what you spent on getting that customer, you have a deal.
The best example of positive unit economics that I have seen in Internet Business Models is that of How does NetFlix make Money.
All factors said and done, you still need to pay every one salary, spend of marketing & sales, pay your vendors, take out costs of the product. Seems like a herculean task isn’t it? Well it is not actually. Following the basics right and fundamentals religiously you can actually make it work.
Step 1: Stop the Me Too Syndrome!
Every one is getting into Food Tech, Fin Tech blah blah blah etc. so should I. My friend is doing something in Ed Tech, but he is not doing this according to my way, if he does this, he will make money and since he is not doing it, why not I do it and make it big, I will also get funding because I know X, I know Y and Z, well Z is dying to invest in my company. Hahahahahahahaha, when I hear this from budding entrepreneurs, I literally laugh on their face and make them understand the hard truth about life and entrepreneurship!
Don’t get into any business niche for the sake of it, if you can identify the gap with a positive delta of the revenue and costs with sufficient size of the market, only then startup with that idea or ELSE NOT!
Step 2: Identify the Niche Correctly
- Do your research right, do proper primary research, and no googling it enough is not the right research.
- Test out the concept with friends and family and tell them that a friend of yours is doing it so they don’t have a bias towards you hearing that it is your idea.
- See international competition and measure how they are doing.
- Identify the target market right.
- Estimate the total market size.
- Estimate the costs associated with selling your 1st million (INR) and please don’t say that I am doing a Hyperlocal in which 10 people that I hire will do 1000 orders in a day (i.e. 100 orders per person) – Be reasonable in estimating the costs : The thumb rule, is discount the sale figure by 25% and multiply the cost figure by 1.25- after doing this financial magic, if your unit economics is still positive by atleast 20% – Go for it! I am 100% sure that your unit economics will turn out to be more than 30% in reality.
- E.g. Dollar Shave Club – Unit Economics
Once you’ve started up follow the below said rules so that you make the cut for the first year with a profit and and extremely positive unit economics and are on track of raising your first million US dollars in seed 🙂
Step 3: Hire if you have to, not if you can – & if you do, Hire Right
StartUps who put up their money in the hope that they will raise their first million dollar within 3 months, start hiring helter skelter with absurd salaries.
- Hire the best fit for your product, not just any tom dick and harry who knocks your door or likes your facebook page
- Put effort in hiring Tele Sales, Direct Sales, Digital Sales Teams – The rest of the teams are just an obligation and expense on the books
- Do not just give hike to people on their last drawn, ask if the salary that they got was inclusive of incentives, reimbursements etc. – And even if you have to give a hike, do not pay more than 10% of their earlier salary, and give huge incentives as a part of the CTC – this way their total CTC on paper looks more than 30% of their earlier package and they are more likely to join. This way they have skin in the game and actually try and sell your product or service so that they make money and in turn you make money
- People are actually ready to come at a lower than previous salary if they see good growth in the organization, find such people
- Do not hire more than required number of tele sales people, the rule of thumb is 80 calls in a business day i.e. 400 minutes of calls (assuming 5 min per call including updating the status of previous calls) i.e. 6.5 Hrs or work + 0.5 hrs break + 1 hr of lunch and other bull sh*t
- If your brand does not require too much interaction on social networks, learn how to do PPC, PPI and SMM (Pay per click, pay per impression, social media management) on your own, this will save you atleast 4 lac PA of savings in salary – most of these tasks are automated and do not require too much time of yours.
Step 4: Do your marketing right
If you spend wisely on the user acquisition, your unit economics will end up in the green always. Having said that you as an entrepreneur should engage in selling your product directly to customers, because, if you can’t, no one can!
Ensure the last campaign results are pondered upon and the campaigns are tweaked as per the need of the hour!
Focus on SEO as a long term strategy for getting leads, because the paid advertising is only gonna go up in per click costs. SEO will always yield higher unit economics as compared to SEM and SMM.
Step 5: Infrastructure
- Ask employees to get their own laptops (for time being – so that you have additional room of 30,000 every month for spending on the ads)
- Ask employees to get their own cell phones and they will be reimbursed 50% of their mobile bill (industry standard that they will use their phone for personal use as well)
- Get the best internet and negotiate for better rates on annual plans
- Ask them not to print unnecessarily, use soft copies on phones
- Ask them to scan with their phones using numerous apps available, no scanner needed
- Start looking out for a larger office once the team is sizable and will flow out of the jar if added one more
- If your business does not require a lavish office for getting customers, look for shared office spaces or in residential complexes so rent is always lower
- Stop wasting electricity so that utility bills are in control
- You do not need an office boy or a cleaning lady full time, hire them on a weekly basis so that you have lower overheads in terms of salaries
- Do not get into unnecessary long leases if not needed
- Savings resulting from these tips will ensure higher unit economics.
Step 6: Vendor / Employee Negotiations
- You can negotiate your way out of every one’s packages – your landlord, your water vendor, lunch vendor, internet vendor etc.
- Negotiate salaries as much as you can.
- Fire people if not performing, ideal state is, the sales and marketing people should generate 4-5 times of their annual salary in sales so that non sales resources are being paid for – this will ensure immensely profitable company and extremely insane numbers on unit economics.
- Try to reduce your cost of goods sold (cogs) to a bare minimal by negotiating with your fulfillers and vendors e.g. if you are a marketplace, ask for higher comissions from your highest sellers – they will happily oblige to it.
Step 7: Start Cross Selling and Up Selling your Customers
- Now that you have been operational for a year or so, and have gathered a critical mass of paying customers contributing to your positive unit economics, now is the time to exponentially grow the unit economics, so that you can make some money
- Start building products that your existing customers will buy or upgrade to
- Call up your existing customers and ask them if they are happy and are in need of anything else related to your product e.g. Hosting companies, built shared hosting to cater to mass users after calling up their exiting customers.
- FlipKart added many products to sell to its existing book buyers. Read about FlipKart’s business model here.
If you start implementing these steps for bettering unit economics, I am 100% sure that you will end up not needing Seed Money 🙂 and if you do get money after these steps, use that for inorganic growth by putting advertisements across the town and go mad!
If you have any other tips to improve the unit economics, please comment below.