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EIA2017Portugal - Rick Rasmussen - Unit Economics

Rick Rasmussen - Unit Economics

EIA2017Portugal - Rick Rasmussen - Unit Economics

  1. 1. UNIT ECONOMICS © 2017 Rick Rasmussen
  2. 2. MODULE OBJECTIVES Learn the basics of unit economics Understand ­Unit Revenue ­Unit Costs ­Fixed Costs (overhead)
  3. 3. MODULE OBJECTIVES Learn the basics of unit economics Understand ­Unit Revenue ­Unit Costs ­Fixed Costs (overhead) Revenues minus Costs equals Gross Profit
  4. 4. MODULE OBJECTIVES Learn the basics of unit economics Understand ­Unit Revenue ­Unit Costs ­Fixed Costs (overhead) Gross Profit minus Expenses equals Net Profit Revenues minus Costs equals Gross Profit
  5. 5. WHAT ARE UNIT ECONOMICS? A microscopic view into the transactions that make up your business Understanding the basics of what it costs to produce and sell one unit of goods ­One pizza ­One job done ­One client serviced
  6. 6. WHAT IS YOUR UNIT ? ­One new device? ­One new client using your service? ­One new subscription? ­One hour of billing time? Figure out the Unit Economics for your business: HOW DO YOU MAKE MONEY? Unit Economics Gross Profits Fixed Costs
  7. 7. Behold the lowly clicker
  8. 8. Behold the lowly clicker This is our Unit Our wholesale price is $16
  9. 9. STARTING WITH UNITS 1. Each unit has a Price 2. Each unit has a Cost ­These are your variable costs ­Also called COGS for Cost Of Goods Sold Unit Economics Gross Profits Fixed Costs
  10. 10. STARTING WITH UNITS 1. Unit Price 2. Unit Cost to produce and sell ­These are your variable costs ­Also called COGS for Cost Of Goods Sold Unit Economics Gross Profits Fixed Costs Unit Price minus Unit Cost is your gross UNIT PROFIT
  11. 11. OUR UNIT COST Unit Economics Gross Profits Fixed Costs Item Cost Housing $1.50 Electronics + Laser $2.50 Battery $0.25 Packaging, manual $1.00 Wireless Module $1.75 Total Unit Cost $7.00
  12. 12. UNIT PROFIT This is the profit you make per unit sold Average Selling Price (ASP): $16.00 Average Unit Cost: - $7.00 Unit Profit: $9.00 Unit profit is also called gross profit or gross margin Unit Economics Gross Profits Fixed Costs
  13. 13. PERCENT PROFIT MARGIN Percent profit margin = (Revenue – cost) / Revenue = Profit / Revenue = $9 / $16 = 56.25% Is this good? 43.75% 56.25% Revenue Unit Costs Unit Profits
  14. 14. GROSS PROFIT We’ve sold 100K units..!! Gross Revenue: $1,600K (same as $1,600,000) COGS: - $700K Gross Profit: $900K Unit Economics Gross Profits Fixed Costs Full P&L Notes: 1. US uses period as a decimal point 2. Larger numbers always expressed as $K ($1000) or $M ($1000K)
  15. 15. UNITS SOLD à GROSS PROFIT Unit Economics Gross Profits Fixed Costs Units Sold (K) 100K Average Selling Price (ASP) $16 Gross Revenue ($K) $1,600 Average Cost $9 COGS ($K) $900 Gross Profit ($K) $700 Step 1
  16. 16. ADD IN FIXED COSTS The costs of being in business These generally include: ­ Salaries ­ Marketing ­ Rent, Insurance and Utilities ­ Interest payments All stay the same whether you sell one or 1M units Unit Economics Gross Profits Fixed Costs
  17. 17. WHAT ARE FIXED COSTS? Almost all businesses have some Rent Most B2B businesses are driven by Salary costs Most B2C and B2B2C businesses add Marketing and Sales as a primary expense * Exception to both would be large factories where Capital cost considerations need to be added Unit Economics Gross Profits Fixed Costs
  18. 18. SALARIES How many people needed to run the business? ­Management ­Engineers ­Marketing, Sales, etc. Unit Economics Gross Profits Fixed Costs
  19. 19. MARKETING Expenses relating to promotion and selling Can be significant for B2C and B2B2C companies Use 30% to 55% of revenues if you need to build a brand Unit Economics Gross Profits Fixed Costs
  20. 20. TOTAL FIXED COSTS Add Salary, Marketing and Sales and other Fixed Expenses Unit Economics Gross Profits Fixed Costs Category Expense Salaries $360K Marketing $72K Rent, etc $90K Total $K $522K
  21. 21. WHAT ABOUT OTHER COSTS? … It depends Yes: If we can attribute marketing costs on a per-unit basis Example is a coupon redeemed for a given unit This is a Unit Cost. No: If we are running a general campaign and cannot attribute to specific unit sales These are Fixed Costs Unit Economics Gross Profits Fixed Costs
  22. 22. A UNIT COST EXAMPLE Coupons… We run a coupon campaign for $2 off For every unit sold with a coupon - $2 is added to the cost of that good sold. We can attribute the coupon to the cost of selling that specific clicker This is a Variable or Unit Cost. Unit Economics Gross Profits Fixed Cost
  23. 23. A FIXED COST EXAMPLE General Advertising We run radio ads, We attend trade shows Increases sales but can’t attribute our expenses to any specific unit sales. This is a Fixed Cost Unit Economics Gross Profits Fixed Cost This image cannot currently be displayed. ?
  24. 24. VARIABLE VS. FIXED COSTS Variable Costs Direct Materials Direct Labor Fixed Costs Corporate Expenses Rent Salaries Insurance Training Research It Depends Shipping, Delivery Marketing Campaigns Sales Commissions Utilities Scrap Recalls
  25. 25. EXAMPLE BUSINESS MODELS Product Business Retail Business Online Business SaaS Business B2B Direct Sales Franchise Model Licensing Model Consulting Sales Commissions B2B2C Donations Not-for-Profit Social Enterprise Two-sided-markets Everyone has different sets of fixed and variable costs
  26. 26. WHAT DO ACCOUNTING PEOPLE CALL THIS?
  27. 27. ALLOCATING FIXED COSTS For tech companies, normally summarized as: ­M&S Marketing & Sales ­R&D Research & Development ­G&A General & Administrative
  28. 28. ZONES OF REASON Once a company reaches “steady state”, you can compare expenses vs. industry norms. For tech companies, normally summarized as: ­ M&S Marketing & Sales ­ R&D Research & Development ­ G&A General & Administrative Category Expense Marketing 20% to 55% R&D 10% to 30% G&A 8% to 15%
  29. 29. FINAL RESULTS Our Clicker Business…!!! Here is everything lined up for one period Are these good results? Results % Revenues $1,600K 100.00% COGS $700K 43.75% Gross Revenue $900K 56.75% Marketing $480K 30.00% R&D $320K 20.00% G&A $120K 7.50% Net Revenue $160K 12.50%
  30. 30. NEXT… BUILDING A P&L Revenue minus COGS = Gross Profit Gross Profit minus Fixed Costs = Net Profit 1. Start with assumptions 2. Build a timeline 3. Unit economics used to derive gross profits 4. Add in fixed costs / expenses 5. Construct your P&L table Unit Economics Gross Profits Fixed Costs Full P&L
  31. 31. BUILDING A FINANCIAL MODEL 31 © Rick Rasmussen 2016
  32. 32. THE FINANCIAL MODEL Investors don’t put their money into ideas. They put their money into businesses… Your financial model is your ‘real’ business plan Revenues Profits Cash needs Hiring plans Runway Plus a sensitivity analysis 32
  33. 33. PHILOSOPHY Build your models to answer questions such as: Is this a real business? Can it make money? Will it scale? Proof Points. Show evidence and traction Your results to date Comparable companies in the market Investors will test every line item Revenues Margins Expenses Cash flow
  34. 34. 34 Cash flow positive
  35. 35. REVENUE TIMELINE VARIES BY MARKET TYPE… Existing Market Re-Segmented Market New Market 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
  36. 36. BASIC FINANCIAL STATEMENTS Income Statement: Stated over a series of reporting periods Also referred to as a profit and loss statement (P&L) Revenues – expenses = profits Balance Sheet: A "snapshot of company's financial condition” Assets = Liabilities + Owner's Equity Cash Flow Statement: Changes in balance sheet accounts affect cash Operations, Investment and Financing activities
  37. 37. INVESTORS EXPECT: A 5-year P&L CEO should build first one Get to know the format and numbers intimately Yearly in the presentation Detailed breakdown for due diligence Year 1-2 are Quarterly (or even monthly) Year 3-5 are annual
  38. 38. INCOME STATEMENT: BASIC STRUCTURE Revenue - Cost of Goods Sold (Variable costs) = Gross Profit (Rev – COGS) Gross Profit - Expenses (Fixed Costs) R&D Sales and Mktg General and Administrative (G&A) = Net Profit [Gross Profit - Expenses] +/- Other Income (expense) = Net Income
  39. 39. REVENUES Work from your time line Break out every one of your products or services List assumptions Units sold per period Estimate ASP (avg selling price) Channels and commissions Churn, Returns, etc. Each company’s business model will differ Benchmark vs. Competition Make sure that it passes the “common sense” test
  40. 40. COMPANY TIMELINE Q3Q1 Q2 Q7Q6 Q8 Cash Flow Positive Series B $7M Started company MVP Full Production Q9 Series A $2M Second prototype Closed Beta 1st alliance signed Seed $100K Q4 Q5 Employees: 4 6 9 10 11 14 18 22 24 Q10 1M Users
  41. 41. OUR EXAMPLE BUSINESS: NEWCO Two product lines with a services component First Product Line: Fast growing “existing product” Sales starting month 2 Lower margins à high COGS Second Product Line: Slower growing “new product” 7 month design cycle to MVP Slow to get traction but high growth. high profit Services business: Scales with headcount
  42. 42. NEWCO SHORT-TERM REVENUE ASSUMPTIONS Yr 1 Q1 Yr 1 Q2 Yr 1 Q3 Yr 1 Q4 Yr 2 Q1 Product 1 Units Sold 150 600 2400 9600 12000 ASP $15 $20 $25 $25 $25 Total $K $2.25 $12 $60 $240 $300 Product 2 Units Sold 25 75 100 ASP $0 $50 $75 Total $K $0 $3.75 $7.5 Services and Maintenance Total $K $5 $10 $20 $40
  43. 43. NEWCO 5-YEAR REVENUE ASSUMPTIONS Year 1 Year 2 Year 3 Year 4 Year 5 Product 1 K Units 12.75 50 200 500 750 ASP $24.65 $25 $20 $16 $14 $K $314 $1250 $4000 $8000 $10500 Product 2 K Units 0.1 5 25 100 1000 ASP $62 $75 $60 $50 $40 Total $K $3.75 $375 $1500 $5000 $40000 Services and Maintenance $35 $750 $2250 $3500 $5500 Total $K $353 $2375 $7750 $16500 $56000
  44. 44. COST OF GOODS SOLD (COGS): Unit economics Variable costs change if you produce more or fewer units Physical products: Cost of manufacture, shipping, … Service based: Cost of services (hours) Virtual based: Customer Acquisition Costs (CAC) Gross Profit = Revenue – COGS Gross Margin % = Gross Profit / Revenue
  45. 45. PRODUCT 1: 5-YEAR COSTS AND MARGINS Year 1 Year 2 Year 3 Year 4 Year 5 Product 1 K Units 12.75 50 200 500 750 ASP $24.65 $25 $20 $16 $14 $K $314 $1250 $4000 $8000 $10,500 Unit Cost $20 $18 $15 $12 $10 COGS $255 $900 $3000 $6000 $7500 Gross Profit $59 $350 $1000 $2000 $3000 Margin % 9.8% 28.0% 25% 25% 28.6%
  46. 46. PRODUCT 2: 5-YEAR COSTS AND MARGINS Year 1 Year 2 Year 3 Year 4 Year 5 Product 2 K Units 0.1 5 20 100 1000 ASP $62 $75 $60 $50 $40 Total $K $3.75 $375 $1200 $5000 $40000 Unit Cost $55 $40 $30 $22 $18 COGS $K $5.5 $200 $600 $2200 $18000 Gross Profit $K ($1.75) $175 $600 $2800 $22000 Margin % (46.7%) 53.3% 50% 44% 45%
  47. 47. SERVICES: 5-YEAR COSTS AND MARGINS Year 1 Year 2 Year 3 Year 4 Year 5 Services and Maintenance Gross Income $35 $750 $2250 $3500 $5500 COGS $5 $25 $100 $150 $200 Gross Profit $30 $725 $2150 $3350 $5300 Margin % 85.7% 96.7% 95.6% 95.7% 96.4%
  48. 48. EXPENSES: WHERE TO START Fixed Cost expenses occur independent of units produced Salaries Start with a hiring chart by dept. Whom do you need & when State expected salary In the US add ~22% for payroll taxes, benefits, overhead Major line items are listed by “department” Research & Development (R&D) Engineering and development Sales & Marketing Salaries, commissions, expenses General & Administrative Management, finance, overhead, rent
  49. 49. HEADCOUNT: PRODUCT LINE 1 -- EXISTING PRODUCT Dept $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Engr R&D 150 1 1 1 1 1 1 1 1 Des Engr R&D 120 1 2 2 3 3 2 1 1 Prod Engr R&D 110 1 1 2 2 3 3 3 Apps Engr R&D 100 1 2 3 3 2 Mkg S&M 100 1 1 2 2 2 2 2 1 Sales S&M 100 1 1 2 2 1 1 Support G&A 70 1 1 1 1 1 Staff G&A 50 1 1 1 1 Headcount 3 5 7 11 14 15 13 11 Salaries $K $93 $150 $200 $300 $1450 $1540 $1320 $1120
  50. 50. HEADCOUNT: PRODUCT LINE 2 – NEW PRODUCT Dept $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Engr R&D 150 1 1 1 1 1 1 1 Des Engr R&D 120 1 2 2 3 3 4 6 8 Prod Engr R&D 110 1 2 2 3 3 3 Apps Engr R&D 100 1 2 3 4 5 Mkg S&M 100 1 1 1 1 2 2 2 3 Sales S&M 100 1 2 2 2 3 Support S&M 70 1 1 1 1 1 Staff G&A 50 1 1 1 1 Headcount 2 4 5 10 14 17 20 25 Salaries $K $55 $123 $150 $275 $1450 $1780 $2120 $2660
  51. 51. HEADCOUNT: SERVICES AND MAINTENANCE Dept $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Svrcs S&M 120 1 1 1 1 1 1 Managers S&M 90 1 2 2 2 3 Cust Srvc S&M 60 1 2 3 3 3 Engineers R&D 80 1 1 2 2 2 3 Staff G&A 50 1 1 1 1 Headcount 2 4 8 9 9 10 Salaries $K $50 $88 $630 $690 $690 $780
  52. 52. HEADCOUNT: GENERAL & ADMINISTRATIVE $K Dept Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 CEO 150 G&A 1 1 1 1 1 1 1 1 COO 120 G&A 1 1 1 1 CFO 110 G&A 1 1 1 1 Controller 100 G&A 1 1 1 1 1 1 1 Finance 70 G&A 1 1 1 2 4 4 5 5 VP Ops 110 G&A 1 1 1 1 Operations 70 G&A 1 3 5 7 8 Staff 50 G&A 1 1 2 4 4 4 Headcount 2 3 4 6 14 18 21 22 Salary $K $55 $80 $98 $133 $1200 $1440 $1650 $1720
  53. 53. BUILDING OUT SALARIES Q1 Q2 Q3 Q4 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 R & D 97 222 250 337 906 1860 2080 2300 2740 Sales & Mktg 50 50 130 194 524 1360 1420 1320 1510 G & A 55 80 98 133 366 1350 1590 1800 1870 Overhead X 1.22 R & D 119 271 305 411 1105 2269 2538 2806 3443 Sales & Mktg 61 61 195 237 639 1659 1732 1610 1842 G & A 67 98 120 162 446 1647 1940 2196 2281 Salaries 247 430 620 810 2190 5575 6210 6612 7566
  54. 54. NON-SALARY EXPENSES R&D Subcontractors and outsourced engineering Non-depreciated tools, servers Marketing and Sales Trade shows Mktg campaigns G&A List IP, legal, accounting expenses Large expenses like rent, legal, travel Either put into G&A or divide among departments as a % overhead
  55. 55. ADDING IN OTHER EXPENSES Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Rent 2 3 4 4 20 30 40 50 Travel 1 1 2 3 20 40 50 60 Legal 10 5 8 8 40 60 80 100 Accounting 5 3 3 4 20 30 40 50 IT 5 5 5 5 20 25 30 35 Consultants 2 4 6 40 50 60 70 Marketing Campaigns 2 8 20 20 100 100 100 100 Reserves 10 10 15 15 100 150 200 300 Total 35 37 51 65 360 485 600 765
  56. 56. VOILA..! NEWCO PROFIT & LOSS Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 5% Revenues Product Line 1 $314 $1250 $4000 $8000 $10500 18.8% Product Line 2 $4 $375 $1500 $5000 $40000 71.4% Srvcs & Maint $35 $750 $2250 $3500 $5500 9.8% Total Revenue $353 $2375 $7750 $16500 $56000 100% Cost of Sales $265 $1125 $3700 $8350 $25700 45.9% Gross Income $88 $1250 $4050 $8150 $30300 54.1% Expenses R&D $411 2269 2538 2806 3443 6.1% S&M $237 1659 1732 1610 1842 3.3% G&A $162 1647 1940 2196 2281 4.1% Other $65 360 485 600 765 1.4% Net Income (787) (4685) (2645) 938 21969 39.2%
  57. 57. FINANCIAL TRAPS Underestimating marketing and sales expenditures ­ Especially while “Crossing the Chasm” ­ Engineers: I’m speaking to you Underestimating time to: ­ Raise money ­ Hire key personnel ­ Collect Accounts Receivable Underestimating cash burn
  58. 58. FINANCIAL TEAM TIMING Bootstrap Revenues/seed Series A/B exit CPA setup You or part-time bookkeeper CPA and Attorney Review Full-time Bookkeeper or Controller Controller and Part-Time CFO Hire CFO
  59. 59. A WORD OF CAUTION This material is not sufficient to run your day-to-day operations If you haven’t already… It’s worth taking a basic accounting course Focus on Financial Statements, Reporting, Auditing Be Smart. Money is Important..!

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