Unit Economics

How to use the Unit Economics sheet to model and communicate margins, breakeven, and lifetime value on a per-unit basis.

The Unit Economics sheet provides a place to analyze fundamental unit economics by calculating margins, breakeven, and LTV (lifetime value, or customer lifetime value) based on inputs of recurring and transaction (one-time) revenues and cost of sales, churn rates, customer lifetime, and more.

This sheet is a base offering, included in the Standard Financial Model, Starter Financial Model, Runway and Cash Forecasting Tool, and all Standard model variants.

How to use

The Unit Economics sheet is detached from the rest of the model by design, to make it easy to use for analysis purposes. It does not draw on inputs elsewhere in the model, and can be replicated (to model unit economics of multiple segments or products independently) or deleted from the model easily.

How it works

The basic input structure is to input per-month or per-unit revenues and cost of sales, which is then used to calculate gross margin on a recurring (monthly, or the time period relevant to your revenues and cost of sales inputs) and transaction (one-time) basis. Using that and additional assumpions around growth rate in gross margin, churn, customer lifetime, discount rate, and acquisition and retention costs, the model automatically created a forecast of revenues, expenses, and margin over time. This calculates customer lifetime value (CLTV or LTV) based on the inputs for acquisition and retention costs. The model also creates a chart that allows you to easily see when acquisition costs are recouped - when breakeven is reached - and shows how the lifetime value is earned over time.

Here’s a quick example:

Inputs

There are a few sections for inputs on the sheet

  • Revenues: use the labels to define what the revenue is, for your own understanding, then input the amount and select “recurring”, “one time”, or “transaction” from the dropdown. That selection defines whether to model it as a recurring revenue stream every period (most people will think of this as monthly) or a one-time transaction. (You can have this transaction repeat through the churn and average number of purchases per year assumptions.)
  • Costs: use the labels to define the cost of sales, then type in the amount and select “recurring” or “transaction” from the dropdown.
  • Customer Acquisition Cost: one-time customer acquisition cost (CAC) assumed to be in the first period in the model
  • Cost of Retention and Expansion, Recurring: costs incurred to retain recurring revenues
  • Cost of Repeat and Expansion, Transaction: costs incurred towards repeat transaction revenues
  • Period length, recurring: Set the period to be used for the per period rates. For example, annual rates are “12”, monthly rates are “1”, so you can use this to set the period used for churn. This assumes revenues occur every month, and the churn off using this period length.
  • Per period Growth Rate, recurring in gross margin: average monthly growth rate per existing customer at end of forecast period, averaged monthly.
  • Per Period Churn, recurring: monthly, for recurring; churn is the % from the original base, not 5% of the outstanding base, to equate the LTVs
  • Average Customer Lifetime, recurring: calculated from the churn inputs
  • Period length, transaction: This sets the period for which transactions repeat; this assumes revenues only occur at increments of the period length
  • Per period growth rate, transaction: This sets the growth rate in revenues at every increment of transaction revenues
  • Per period Churn, transaction: This sets the assumption for how many transactions do not repeat at each period increment
  • Average Customer Lifetime, transaction: # months for recurring revenues, calculated from the churn rate input, but can be overwritten here
  • Average Customer Lifetime: # months for transaction revenues, calculated from the churn rate input
  • Discount Rate: annual rate. Used to discount future growth margin to value today, input a weighted average cost of capital (WACC) applicable for your industry.
  • Less: One time Discounts: less one-time acquisition discounts. Enter as positive number.

The model then create a couple calculations:

The model then calculates an overall LTV, and then creates a table of margin, acquisition and retention costs, and discounted gross margin by month, for a 36 month period, to help communicate the average cash flows on a per-unit basis.

Common Modifications

One common modification is inserting or deleting rows in the revenues and cost of sales sections to change the inputs used to calculate gross margin.

One common usecase of this sheet is to replicate the sheet to create multiple unit economics sheets for different customer sets, products, business segments, or any segment-based views of the business.

Since the Unit Economics sheet is detached from the core model, it is easy to edit the inputs and create different views without distrupting the core of the model.

Questions, contact me.

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