Why Unit Economics Matter Even and Especially at Early-Stage Startups
Startup founders who think they can disregard the concepts of customer lifetime value and customer acquisition costs until they have generated first traction make a huge mistake. After having found a significant problem to solve, unit economics should immediately come to mind. Here is why:
1. Some problems are not being solved for a reason.
If you cannot create strong unit economics solving a problem, you will not be able to create a viable business model around solving this problem. If so, don’t start at all! Some start anyway and get a lot of funding despite not being able to create a viable business model - just think of Gorillas and the likes - crazy. But exceptions and I don’t recommend emulating this.
2. Investors look for efficiently growing startups
In the current funding environment, efficiently growing startups are sought after. If you generate strong unit economics, you will be well set for growing efficiently.
3. With a few assumptions around CAC, you can assess how to price your product
With a few assumptions around your potential acquisition channel and the associated costs, you can better assess how to price your product or service. E.g. If you assume it costs 100 Euro to acquire a customer, customer lifetime value should at least be 300 Euros (as a rule of thumb). Some founders argue they do not know the costs and cannot make reasonable assumptions. I argue there are definitely companies out there selling similar products to the same customers or different products to similar customer. Do some research!
4. With a few assumptions around your customers willingness to pay, you can assess what CAC you can incur
If you understand or make reasonable assumptions about the customers‘ willingness to pay, you can get great insights about the channel you can use. For instance, if you want to sell to the long tail of independent entrepreneurs (like restaurateurs) you can assume a low willingness to pay. You already know that high-touch acquisition channels won‘t work. Too expensive.
It is never too early to embrace the unit economics concept. I would start analyzing CAC, CLV, and Payback Period even before product and MVP launch.