How to Model Unit Economics for Your Early-Stage Startup
The Foresight team regularly helps startup clients answer pressing questions about Financial Modeling, IP Strategy, Valuation, and more. To share these insights, we’ve created the Startup Q&A Blog Series. This article focuses on modeling Unit Economics for early-stage businesses.
Question: How Do I Model My Unit Economics?
One of our clients asked for guidance on modeling Unit Economics for two different business models. The client was launching an Airbnb-type platform and was weighing a Subscription model against a Commission model.
Although these two business models differ, the steps for modeling Unit Economics are similar. The primary difference lies in the Monthly Recurring Revenue (MRR) component.
Step 1: Identify the Unit
The first step in modeling Unit Economics is identifying the Unit. The Unit is the revenue-generating component of your business model.
-
For consumer software or subscription businesses (e.g., Spotify, Microsoft Office 365), the Unit is likely a single subscriber.
-
For enterprise SaaS businesses (e.g., Salesforce, Workday), the Unit may be an entire organization with multiple users.
For our client’s Airbnb-type platform, the Unit was the Host, not the end consumer. Hosts are the property owners listing on the platform. They drive revenue either through monthly subscription fees or by sharing a portion of rental proceeds.
Step 2: Determine Customer Acquisition Cost (CAC)
Once you identify your Unit, calculate the Customer Acquisition Cost (CAC). This measures the cost to acquire and onboard a single Unit.
CAC typically includes sales and marketing expenses, salaries, and other recurring costs. Unique costs, like legal fees or data hosting, should also be included.
In our client’s case, the CAC components were similar across both business models. However, the Subscription modelrequired higher marketing expenses to acquire paying Hosts, whereas the Commission model had lower costs because acquiring free users is less expensive.
Step 3: Calculate Monthly Recurring Revenue (MRR)
MRR is the revenue each Unit generates on a recurring basis. For a simple subscription business with one tier, MRR equals the monthly subscription fee.
For multiple subscription tiers or additional features, MRR calculations become more complex. Start by determining the average customer and calculating recurring revenue based on their usage.
For our client:
-
Subscription model: MRR is equal to the monthly fee paid by each Host.
-
Commission model: MRR is less predictable. Assumptions are needed for Average Transaction Size, Number of Transactions per Month, and Number of Listings per Host.
This example shows how quickly MRR can complicate modeling under variable revenue structures.
Step 4: Know Your Industry Benchmarks (Churn Rate)
Early-stage startups should always compare key inputs like CAC and MRR to industry benchmarks. Large deviations may indicate unrealistic assumptions. Always justify differences if they exist.
Churn Rate, the percentage of customers lost each month, comes from industry benchmarks in early-stage businesses. Since you don’t yet know how “sticky” your service is, market data will provide guidance on typical customer retention for similar platforms.
Conclusion
By following these four steps—identify your Unit, calculate CAC, determine MRR, and benchmark churn—you can build a strong Unit Economics model. This model serves as the foundation for your overall Financial Model. It also helps define funding requirements and other strategic business decisions.
For a deeper dive, check out Foresight President Efrat Kasznik’s talk, “Telling Your Story with Numbers,” and register for upcoming sessions.