HQQA040 Walk us through the fully burdened unit economics of your product or service

Walk us through the fully burdened unit economics of your product or service – Use your imagination right, and you’ve got this.

Here’s what they mean…

You make money from customers over time. You spend money over time to acquire customers. How much profit (or loss) will each customer generate? That is what this question (“Walk us through the fully burdened unit economics of your product or service”) means to a VC.

There is a joke in the Valley “we lose money on every sale, but make it up in volume.” You have positive unit economics when you make money on every sale.

There are two implications of this question (“Walk us through the fully burdened unit economics of your product or service”). Firstly do you know your business, and secondly, what does your business look like when it grows up?

So dealing with the first part, this is a pretty tough question if you do not know your business well! For a SaaS company, this would include fully burdened CAC, salesperson compensation, expected lifetime revenues, churn, expansion, upsell, etc.

You are looking to show that 1/ the unit economics are positive, ideally sexy, and 2/ you know your ass from your elbow, AKA does the CEO understand his business and can he communicate it?

Now, for the second part. Financial statements and metrics illustrate what a company looks like historically and presently. You hire staff, you get AWS, you pay for an office and all the other line items in a PL/BS. These things can’t illuminate the future, it just shows what an unprofitable startup looks like. So if you can express your unit economics well, such as that you make more money from a customer than it costs to acquire and service, if you spend more money and scale, you can get an idea what you look like grown up and after you have broken even. To understand you as something desirable to acquirers, you have to understand what you look like sub-scale. Otherwise, you are just more of not very pretty.

What you need to say

In the words of a founder of Redfin:

“For us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.

We knew our margin before but hadn’t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they aren’t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness.”