Video: Case Studies and ExamplesCopy

TRANSCRIPT

So, Iu2019m going to walk you through a couple of examples because I think it can help you understand unit economics a little more clearly. So, this is a great set of slides which are from a company called in Clinics which went through, um, the social new venture challenge program that I am part of at the university of Chicago, and um, it’s a really nice example of a number of things that I want to point out. So, first of all this particular company provides therapy for children with autism so that’s basically what the business does and in this particular instance the way that they’ve mapped this out is client level economics; that’s a single child a single child on an annual basis is what this picture shows you, and I think there’s so many nice thing and elegant things about this particular picture. They just want to kind of walk you through what’s going on here. So, first of all, everything is really clearly labeled which can be really helpful in telling a story on a slide. The revenue is clear that is 38,800 per year per child and night, and sort of elegantly and nicely, they’ve really labeled their underlying assumptions right under that in small writing.

You can see the big headline of the amount of revenue that is the unit economics of a single child on an annual basis; so they’ve, um, identified that the unit that they are talking about is per client or per child in this case and they’ve laid out the amount of revenue associated with that unit very clearly. Then, underneath that in the yellow, that’s where the costs stack up. So, you’ve got wages in the form of both technicians and clinicians; that’s how this business works as well as that servicing don’t; they haven’t forgotten the servicing. So, there’s quite a bit of costs associated with billing because this particular business largely relies on insurance. So, billing to insurance can actually add up in terms of the costs after the revenue on the annual basis is subtracted from the cost. There’s a marginal contribution of 12,664. You can see how that lines up really nicely. It’s a very clear and elegant way of laying out this particular unit economic and it gives you an understanding of what we’re really talking about. This is not the whole business. This is a single customer; basically a single child that they’re serving the revenue minus the costs. Now, notice there are not things like rent in these costs, or materials, or the CEO’s salary are not in these costs because those are not unit level costs; those don’t vary based on the number of clients.

These costs that are captured here are only those costs that vary. Only those costs that are incrementally larger because of a single additional child; and that’s really important to think about because that really helps you understand what goes in here and what doesn’t. All those other costs we’re going to look at when we get into operating costs, and Iu2019ll show you how those can get captured in your slides as well.

Here’s another example this is, um, this is for a fast business, uh, software as a service business. So, here and this is another example from a presentation that was done as part of the new venture challenge at the university of Chicago; a company called pipe jump, and here, you see that they have two major costs at the unit level, and here the two costs are those; the cost is the cost of goods sold and that is because this is a software business. So, they have some costs associated with, you know, the increment the kind of variable costs associated with the actual product and then importantly they have acquisitions. This is customer acquisition; and they here, they’re estimating that it is a 200 per customer acquisition with a lifetime value. So, unlike the last slide where we saw they clearly labeled it one client for one, the SAS business operates on contracts. So, here the lifetime value is going to be more than a year. They actually estimated I think two and a half years, and so, they actually are putting the lifetime value the life of the contract and that’s 1400 with a marginal contribution rate then of 954.

You can see that there’s sort of a similar way of setting this up even if there are really different numbers associated with these two businesses, because you should be able to think about what are your variable costs at, you know, kind of, at the, um, unit-level; versus your variable revenue. Essentially like how much you’re going to make on any unit in order to get that marginal profit contribution it’s the same math either way.