When you are just starting out with a new business or a new product, this isn't always the case. Predictive LTV is good when revenue is rather stable. Predictive LTV formula: (T x AOV x AGM x ACL) / C Using the abbreviations from the section detailing the metrics, the formula for calculating predictive LTV is: It can help you avoid a sudden and unexpected drop in sales. This formula tries to take into account how customer preferences change over time. Whichever you use, divide the result by CAC just as you did above for the simplified version to get the unit economics. For newer businesses, or newer product launches where revenue hasn't quite stabilized yet, using a flexible LTV calculation makes more sense. For well-established businesses, predictive LTV is a good choice. There are two popular ways to accomplish this. Instead, you can use additional metrics for a more accurate prediction.
It's looking at the past to try to predict the future. Simply using your LTV metric, however, doesn't always tell the whole picture. Later in the post, we'll discuss ways to take more information into account in order to make a more accurate prediction. For most SaaS businesses, the basic unit economics calculation boils down to LTV divided by CAC. How you derive those values, and what qualifies as a unit, varies depending on the particular business model. The easiest way to calculate the unit economics for your company is to find the revenue per customer and divide it by the costs associated with that customer. Your discount rate is the rate of your return on investment. This is similar to your raw LTV rate, except it only takes the margin into account, rather than total revenue. This is your gross profit divided by your total revenue.ġ2. This is simply total revenue divided by the number of orders. This is your total revenue minus your cost of sales. This is the total amount of money you've made from your customers over the course of the period.
This metric covers the actual number of transactions that have been made during the period and may not equal the number of customers. Not every customer is billed at the same frequency. This is the total number of customers subscribed to your service during the period in question. It is a key component in calculating their lifetime value. This is the average amount of time a customer stays subscribed before they churn. It's the percentage of customers that remain subscribed during a given period. The right amount to spend is very directly tied to your LTV, so calculating and understanding your CAC is extremely important.Ĭhurn rate is the percentage of your customers that cancel their subscription during a given period. If you spend too much, you don't get profit. If you spend too little, you don't get new customers. The total amount of money you spend on sales and marketing to acquire one customer. Calculating LTV accurately can tell you a lot about your business. In SaaS, this is the amount of money you make from the time they sign up, to the time they cancel and don't return. The abbreviations given will be used when describing the various unit economics formulas in the next section.Ĭustomer lifetime value is the average amount of money that you earn per customer over the lifetime of their relationship with you. This section will cover all you need to know. But the more accurate formulas we'll discuss later rely on much more in-depth metrics.
Each of those has its own set of key performance indicators that need to be tracked.īasic unit economics needs just two: LTV and CAC. There are many ways to measure the success of a business and to predict its financial stability.
#Profit per unit calculator how to#
Before we can tell you how to calculate your unit economics, you need to understand the metrics that go into the calculation.
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