Unit Economics: Measuring What Matters in Marketing
Unit economics. They’re what DigiKat is founded on and they’re one of the most important tools in marketing for measuring ROI (return on investment). The term unit economics sounds like it’s very complex and fancy, but it’s actually a really simple concept. Unit economics are the revenues and costs associated with a business model. They are what we measure to find out the ROI of a particular business and their marketing strategy.
There are two main types of unit economics in marketing:
- Transactional– solving for the sale
- Customer-Centric– solving for the customer
Transactional Unit Economics
Transactional unit economics can be expressed as a ratio:
Cost of Transaction Acquisition (COTA) : Average Order Value (AOV).
Transactional economics work on measuring the sale so if you spend $500 on your PPC campaign and get a transaction from an average customer of $1000 worth of products then you end up with a ratio of $500:$1000 or 1:2. This basically translates to getting $2 in for every $1 you put out. Not bad results at all.
Customer-Centric Unit Economics
Again, this type of unit economics can also be shown as a basic ratio:
Cost of Customer Acquisition (CoCA) : Customer Lifetime Value (LTV)
So, say you spend $1000 on a PPC campaign, and 5% of those visitors turn into pre-transactional contacts and then 10% of those visitors turn into customers, then your CoCA is $400. Then, if your average customer spends $4000 over their lifetime (sounds like a lot but it is actually reasonable, don’t worry) then your CoCA:LTV ratio is $400:$4000 or 1:10.
These are really good results, just think, for every $400 you invest, you will get a return of $4000 over your customers’ lifetime with your brand. It’s important to understand these numbers and to be sure that, based on the data you have available to you, your CoCA is not higher than your LTV, otherwise you will be losing revenue.
Remember though, the idea is to invest. Invest in what you predict to be ‘good’ customers. You don’t want to get the cheapest customers possible. What is the possible LTV of cheaper customers? Be smart in your investment and you are bound to have successful customer centric unit economic ratios. When you understand this type of unit economics, it becomes much easier to know where to invest your money for customer acquisition to receive the best benefit.
Unit economics are effective in measuring the success of a business and whether the numbers coming in are higher than the numbers going out. They give direct insight into what is being done right and what might need to be changed in your strategy. Your focus with this strategy should be on customer-centric unit economics as these measurements really highlight the effectiveness and success of your business overall.