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2019-10-14 04:27:27

Sales wasn’t great and with a few hours left, I needed to at least break-even. Thankfully Nasi Lemak have a good margin so I could offer a buy 1 free 1 deal. This is effectively a 50% discount but you have to buy at least 2 packets.

Rough numbers to illustrate the example. (it’s been a while)

100 packets cost at $250, $2.50 per packet

Initial price at $5 ($2.50 margin, stall is free)

Sold 20 packets x $5 = $100

Minimum price to break-even

($250 - $100) / (100-20) = $1.875

Buy 1 free 1 deal at original price of $5

Sold the rest 80 packets x $2.50 = $200

Total revenue = $300

Obviously I was a bad at sales (till now), but at least I didn’t incur a loss and no Nasi Lemak was wasted.

If you are running a service or subscription business, the unit economics will revolve around your customer or client. For these types of businesses, retaining a customer is important due to the high acquisition cost. But if you are able to keep them around, you will generate more future revenue from them.

Customer LifeTime Value (CLV) is a prediction of the net profit attributed to the entire future relationship with a customer.

To figure out how much a customer is worth to your business, we calculate the Customer LifeTime Value (CLV) by

CLV = Average Purchase Cost x Frequency of Purchase x Gross Margin

Note: This is a simplified formula to predict how much a customer would bring to the business. There are many predictive algorithms to get a more accurate CLV.

Next, we will calculate the cost of all the effort you put into acquiring a new customer for your business. This covers all your sales (commissions) and marketing (advertising) efforts including related overhead (salaries) and expenses.

Customer Acquisition Cost (CAC) is the cost associated in convincing a customer to buy a product/service.

CAC = Total Acquisition Spend / Number of Customers Acquired

Subscription Example: Software as a Service

Unit = A subscriber

Assuming subscription cost $30 per month, customer stays subscribed for a year on average with a gross margin of 50%

CLV = $30 x 12 x 50% = $180

Monthly expenses to acquire new customers

Ad spend = $500

Ad campaign design, copywriting = $50

Marketing tool subscription = $50

Customer acquired = 10

CAC = ($500 + $50 + $50) / 10 = $60

CLV:CAC ratio = $180:$60 = 3:1

Generally, a CLV:CAC ratio of 3:1 is considered good as it shows the business is able to grow and scale well. A low ratio would mean you are spending too much to acquire a customer while a high ratio indicate that you should consider spending more to grow faster.

To increase CLV, you will need to improve your retention and lower your churn rate. Simply put, you want your customer to stay for as long as possible.

Retention rate is the ratio of the number of retained customers to the number at risk. Churn is one minus the retention rate as a percentage (i.e. 1-R%). If 80% of your users returned from month 1 to month 2, you would have a churn of 20%

CLV:CAC ratio is similar to contribution margin in that it measures the profitability of the business. A subscription business is profitable and scalable when it’s able to spend money to acquire new customers while retaining them long enough to turn a profit.

customer business your cost ratio unit economics margin packets subscription acquire free

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