AIA2018 - Rick Rasmussen - Startup Financials

UNIT ECONOMICS

Fundamental building block of any financial model

Unit RevenueUnit CostsFixed Costs (overhead)

MODULE OBJECTIVES

Revenues

minus Costs

equals Gross Profit



MODULE OBJECTIVES

Gross Profit

minus Expenses

equals Net Profit

Revenues

minus Costs

equals Gross Profit



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 pizzaOne job doneOne client servicedOne clicker delivered

REVENUE MODELS DRIVE UNIT ECONOMICSType Business Revenue Model Example

PrimaryProduct Sales One time sale Presentation ClickerService Sales Hourly Rate ConsultantTrade Upcharge Retail Sales

Derivative

Subscription Monthly Revenue Software as a ServiceMarketplace Transaction Fees Ebay, EtsyBrokerage Commission Fees Real EstateEcosystem Combination Apple

Example: Product Sales

Behold the lowly clicker

Getting into theClicker business

What type of business?

Existing? Re-segmented? New?

Getting into theClicker business

What’s the TAM?

Retail price: $35Channel Margin: $19

Wholesale price $16

Retail price: $35Channel Margin: $19

Wholesale price $16

You typically don’t control this…

Revenue that comes to the company

UNIT ECONOMICS

1. Unit Price à $16

2. Each unit has a CostThis is your variable costAlso called COGS for Cost Of Goods Sold

UNIT COST

Subsystem Cost

Housing $1.50

Electronics + Laser $2.50

Battery $0.25

Packaging, manual $1.00

Wireless Module $1.75

Total Unit Cost $7.00

Draw a Circle around the Unit. What does it directly cost to produce?

UNIT PROFIT

This is the profit you make per unit sold

Unit Price minus Unit Cost

UNIT PROFIT

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 often called unit margin

Unit Price minus Unit Cost

UNIT PROFIT

UNIT 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

GROSS PROFIT

Assume we’ve sold 100K units…

Gross Revenue: $1,600K (same as $1,600,000)

COGS: - $700K

Gross Profit: $900K

Notes:

1. US uses period as a decimal point

2. Larger numbers always expressed as $K ($1000) or$M ($1000K)

UNITS SOLD à GROSS PROFIT

Units Sold (K) 100K

Average Selling Price (ASP) $16

Gross Revenue ($K) $1,600Average Cost $7COGS ($K) $700Gross Profit ($K) $900

Step 1

FIXED COSTS

Generally includes:

Rent, Insurance and UtilitiesSalariesMarketingOther (Interest payments

All stay the same whether you sell one or 1M units

DO YOU HAVE FIXED COSTS?If you have a physical building, you probably pay Rent, Insurance, Utilities

If you have employees, you have Salary costs

If you promote, add Marketing and Sales as a primary expense

* Exception to both would be large factories where Capital cost considerations need to be added

SALARIES

How many people needed to run the business?

ManagementEngineersMarketing, Sales, etc.

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

TOTAL FIXED COSTS

Add Salary, Marketing and Sales and other Fixed Expenses

Category Expense

Salaries $360K

Marketing $370K

Rent, etc $190K

Total $K $920K

WHAT ABOUT OTHER COSTS?… It depends

Yes:If we can attribute marketing costs on a per-unit basisExample is a coupon redeemed for a given unitThis is a Unit Cost.

No:If we are running a general campaign and cannot attribute to specific unit salesThese are Fixed Costs

A UNIT COST EXAMPLE: COUPONSWe 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.

A FIXED COST EXAMPLEGeneral 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

?

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

EXAMPLE: AMAZON AND AMAZON PRIME

Standard Amazon CustomerPays Shipping on every item purchased

Shipping expenses are known for each item

These are Variable CostsThese are Fixed Costs

Amazon Prime CustomerPays $100/year membership and getsFree shipping

Shipping expenses are not correlated for each item

EXAMPLE BUSINESS MODELSProduct Business

Retail Business

Online Business

SaaS Business

B2B Direct Sales

Franchise Model

Licensing Model

ConsultingSales CommissionsB2B2CDonationsNot-for-ProfitSocial EnterpriseTwo-sided-markets

Everyone has different sets of fixed and variable costs

ALLOCATING FIXED COSTS

For tech companies, normally summarized as:

M&S Marketing & SalesR&D Research & DevelopmentG&A General & Administrative

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 & DevelopmentG&A General & Administrative

Category Expense

Marketing 20% to 55%

R&D 10% to 30%

G&A 8% to 15%

FINAL RESULTS

Our Clicker Business…!!!

Here is everything lined up for one period

Are these good results?

Results %

Revenues $1,600 100.00%

COGS $700 43.75%

Net Revenue $900 56.75%

Marketing $480 30.00%

R&D $320 20.00%

G&A $120 7.50%

Total Fixed Costs $920 57.5%

Net Profit ($20) -0.75%

NEXT… BUILDING A P&L

Revenue minus COGS = Gross Profit

Gross Profit minus Fixed Costs = Net Profit

1. Start with assumptions 2. Build a timeline3. Unit economics used to derive gross profits4. Add in fixed costs / expenses5. Construct your P&L table

Unit Economics Gross Profits Fixed Costs Full P&L

AIA2018 - Rick Rasmussen - Startup Financials

Technology

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