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Why Unit Economics is Important for Product?

Most of the startups don't think about unit economics here I would like to share the importance and its formulas. Unit economics is the most important to evaluate the performance of a business. It’s more about numbers and statistics within the product, and some of them are completely unrelated to money.

With marketing activities, each type of user activity has its own metrics, which product managers must use to evaluate the effectiveness of the product as a business. Always you should keep these metrics in your mind almost everything that happens within the product and evaluate the fidelity of your product development.

ARPU (Average Revenue Per User) - average revenue per user. Please note that the entire audience is taken into account: both paying and non-paying users.

Formula:
ARPU = (Monthly Revenue / Users)
ARPU is an indicator of the monetization effectiveness of a project the higher it is, the more income (not profit) an average of 1 user brings.

ARPPU (Average Revenue Per Paying User) - shows the average income from one paying user per month.

Formula:
ARPPU = monthly user revenue/number of paying users
A more rigorous and clear metric showing the overall level of profitability and sales by paying users.

CR (Churn Rate) - user turnover rate, which means the percentage of product loss for customers paying for it.

Formula:
CR = (the number of stopped paying / paying users).
For example, if 130 out of every 1000 monthly paying users leaves each month, then the monthly Churn rate for such a product will be 130/1000 = 0.13 or 13%. The higher the score, the worse for the product.

ALC (Average Lifetime of a Customer) - the average duration of the user’s work with your product.

Formula:
ALC = 1 / churn rate.
The higher the score, the better for the product.

CAC (Customer Acquisition Cost) - This is an advertising metric that shows the cost of paying for a customer (paying user).

Formula:
CAC = (budget for advertising / the number of paying customers attracted to it).
If the CAC is equal to 33% of your client’s lifetime value, then this can already be considered a success.

COGS (Cost of goods sold) - monthly variable costs for the operation of your product. Something without which no product can exist.

Formula:
COGS = (hosting + salary of a support or accounting team + any cloud solutions like mail / gitlab) / number of paid clients
The important point is that COGS calculation should include only those expenses without which the product would not be possible (i.e. not including advertising budgets, salaries of marketers and developers, etc. expenses).

LTV (Lifetime value) is considered based on ARPU. This is the income that an average user brings in for the present or future use of our product.

Formula:
LTV = ARPU x ALC

AC (Average Check)

Formula:
AC = monthly revenue / transactions
There are additional metrics that are involved in the calculation of basic ones and which can also signal you about “climate change” inside the product.

DAU (Daily Active Users) or MAU (Monthly Active Users) - the number of unique users who logged into the product at least once during the day or month, respectively. A good internal metric by which you can consider the involvement of the audience in the product.

When working on unit economics, it is important to understand what metric expresses to evaluate the effectiveness of your particular product.

Build an internal dashboard to track statistics it's more effective and will allow you to monitor analytics under high magnification.

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