
Unit Economics - guyshachar
https://hackernoon.com/dear-unit-economics-i-hate-you-7c28b9aef08d#.ex1czp5un
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jasode
I'm dismayed that _twice_ , the titles have obscured what the essay is about.
The article's title is _" Dear Unit Economics, I hate you"_ which buries the
lede, and then the (original) HN submitted title _" The Most Terrifying Term
in the Entrepreneurial Dictionary"_ is another distraction.

The article doesn't explain any strategic thinking or tradeoffs around "unit
economics". It's mostly about the "on-demand" startups that are trying the
"Uber for X" model not making money. Yes, their unit economics are bad (so
far) but the author doesn't make a distinction between strategically losing
money on purpose to try and gain market share vs a fundamentally broken
businesses models that loses money forever.

Example of negative unit economics that turned out fine would be Paypal's $10
credit promotion for new account signups. They had negative unit economics
from 1998 - 2002

Yes, the vast majority of on-demand startups will fail but they feel their
unit economics will eventually become positive. A better analysis would
explain why they will _never_ become positive. (If the speculation on eventual
W-2 employee status for all "contractors" is the main reason, well, I suppose
you could have titled the article _" W-2 threatens all on-demand startups"_) A
lot of them are losing money _now_ but we (and the VCs funding them) already
know that.

~~~
ndonnellan
It would also be a better article (or good article at all) if it included
actual examples of unit economics perhaps backed by data. I would love to see
data showing that the majority of these companies are built on lies, but it's
not here.

~~~
eridius
Agreed. I thought it was very strange that the article tries to imply that all
on-demand startups beyond Uber are in trouble, when that's not actually the
case. At least one, if not several, of the listed non-Uber companies are doing
just fine.

~~~
Amygaz
Depends how you define being in trouble. I know a handful of people who
started companies based on lies, and a true dose of narcissism, and were
acquired with still nothing to show for

------
mootothemax
If your Lifetime Value is only "bigger" than your Customer Acquisition Cost,
chances are you're still going to be operating at a loss.

A healthy aim is an LTV of three times your CAC: LTV > (3 x CAC)

That way - and remember that we're not talking hard figures here, just rough
estimates - you're still aiming to cover your operating costs _in addition_ to
"just" gaining customers.

~~~
sharemywin
But, a lot of business take years to figure out LTV. And investing in good
customer service improving the product can all lead to a much better LTV.
Also, there are many ways cut CAC in half possibly.

~~~
mistermann
I always ask myself this whenever it is asked on Dragon's Den....could someone
explain how customer acquisition cost is calculated? The "common sense"
approach I'd think is something like:

(sales & marketing spend) / (customer count)

....but this would completely ignore whether the spend was efficient, so is
there a more sophisticated way of calculating CAC?

~~~
sharemywin
if you can break out where your customers come from(which channel) you can get
some idea of what the channel is contributing. but it even that's a little
misleading because it's hard to get referrals if you don't have customers in
the first place, so where do those get attributed to.

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onion2k
_Paying more money to get a premium service is not innovative in any kind of
way. It’s just another luxury service for people who can afford it, and this
concept has been around for quite a while now._

Gig economy businesses that work are _growing_ the market, not just taking a
share of an existing market. Uber works fantastically because they're cheap
enough and accessible enough that people who previously didn't often take a
cab now can. That's on top of disrupting the taxi market. If a gig economy
business is aiming to lower costs for existing customers then their business
model is _very_ wrong. They should be aiming to bring in vast numbers of new
customers who _don 't_ use the luxury services already. That's where the money
and growth lies.

~~~
nine_k
Frankly, Uber's unit economy sucks so far, too.

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spectrum1234
This article is terrible. Author is clearly in over his head. The most
important thing for startups is not unit economics but balancing resources for
both product and marketing/growth.

With a startup you tackle challenges from highest risk to lowest risk. This
ignorant author is missing much higher risks and using observation bias to
confirm his beliefs.

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aelaguiz
The whole article can be summarized by reading the last sentence: "some
problems were just not meant to be solved."

That's it. The author doesn't believe the on-demand economy can work. The rest
is just lead up.

I disagree with his assessment.

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sharemywin
unit economics are tricky though. Brand, Channel mix, referrals, PR,
endorsements, and more can all effect CAC. customer service and targeting can
have a huge impact on LTV.

~~~
guyshachar
You're right! It can get a little tricky... Still, if you're unit economics
don't work, you're going to have a hard time building a company.Disruptive
business models sometimes work (and history is always written in hindsight)...
But basic economic principles always hold true

~~~
rgbrgb
The point is that unit economics are not some static thing, LTV is a product
of conversion rates at each step of your funnel. Every step you improve by x%
improves LTV by x% for new users (for this type of company at least).

~~~
sharemywin
Also, think of most small service businesses they hustle their ass off in the
beginning with horrible CACs but then they start getting referrals and LTV/0
starts looking pretty good.

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rororororo
The article also misses the value of intangible assets and strategic options.
Unit economics might be negative for now but who knows what a company might be
doing in the future. Of course there might be wildly overvalued companies but
may be negative unit economics can be seen as an investment in operational
scale -- not diluting fixed costs but actually getting to scales where the
economics change and new strategic options become viable. (Example: Uber
moving from hailing to self-driving cars, obviously.)

