Simple Steps to Improve Your Startup's Unit Economics and Reduce Costs

Forty-four percent of startups shut down in 2022 because they ran out of cash. Extremely high burn rates, insufficient funding, poor financial planning, and overhead expenses — these things can cripple even the most brilliant companies.

Before joining DeckRobot, I had spent more than 5 years working in fast-growing startups, overseeing their finances and operations. This experience has led me to a conclusion:

All startups tend to undermine themselves in a similar way.

So I've developed basic rules to help reduce recurring expenses and fine-tune their operations.

Know and track your key metrics

Analyzing financial data from the very beginning provides a clear picture of a startup's financial health; it helps identify areas of high and unnecessary costs.

The three key metrics to analyze from the beginning to pinpoint areas of improvement are CAC, CLV, and Gross Margin.

Customer Acquisition Cost (CAC). It is the cost a business incurs to acquire a new customer. The formula for calculating it: CAC = Total Sales and Marketing Costs / Number of New Customers Acquired.

If you spend $200,000 per month on advertisements that bring in 1,000 clients, your CAC amounts to $20.

The definition of a "good" CAC can vary depending on industry standards, business objectives, and the competitive environment. For reference, the benchmark CAC for e-commerce is $86, for B2B SaaS it is $239, and for real estate, it stands at $791.

To determine whether this is an acceptable or unfavorable CAC, you'd need to consider other factors, including the expected CLV for a typical customer.

Customer Lifetime Value (CLV or LTV). This metric represents an estimated amount of revenue a business can generate from a single customer.

Its formula: CLV = (Average Purchase Value x Average Purchase Frequency) x Average Customer Lifespan.

It’s considered healthy when CLV exceeds CAC. If it doesn’t, consider re-evaluating your marketing strategy.

Gross Margin. It's the percentage of revenue remaining after subtracting the cost of goods or services sold. Its formula: Gross Margin = (Total Revenue - Cost of Sales) / Total Revenue.

Imagine you are running a SaaS company and you want to calculate your Gross Margin. Let’s say, your total subscription revenue is $300,000. Your expenses: Hosting and maintenance costs ($60,000), customer support costs ($30,000), other expenses ($10,000).

In this example, Gross Margin for the SaaS business is 66.67%. This means that, after accounting for the direct costs and other relevant operating expenses, you retain approximately 66.67% of your total SaaS subscription revenue as a gross profit at this stage. A healthy gross margin is 50-70%.

Boost efficiency at your workplace

Start by outlining your critical business processes and identifying bottlenecks — points where the workflow is slowed down.

For instance, a developer might be overloaded with tasks, leading to missed deadlines and a decline in work quality. In such instances, introducing a part-time developer could prove beneficial.

Another bottleneck example: Your employees are manually doing work that could be automated. Collecting sales and marketing data, creating email campaigns, and customer support –– these are time-consuming tasks that often can be automated.

A recent study suggests that automation can reduce business costs by 50-60%.

How to automate startup processes:

1. Organize and track issues. Use JIRA, Asana, Trello, or similar services to monitor your team's performance and prevent chaos.

2. Set up continuous integration (CI). Use Jenkins, AWS CodePipeline, CircleCI, or other CI systems that can detect issues early in the code development process, preventing costly bug fixes later on.

3. Keep track of your finances. Monitor your income and expenses and gain insights with QuickBooks, FreshBooks, Wave, Xero, Zoho Books, or similar tools.

4. Optimize marketing and sales. Consider using Salesforce, HubSpot, GrowBots, and Zapier to improve your marketing and sales efforts.

   Eliminate unnecessary expenses

   Every penny counts for a startup. You should regularly review your expenses and cut excessive spending. Here's what you can do to reduce costs.

   
   

   Rethink your hiring strategy. Labor costs consume up to 70% of a startup's expenses. At the initial stage, most of the tasks can be managed by three employees: CEO, CTO, and CMO.

   
   

   Review your marketing expenses. Early-stage startups spend 10% of the planned annual revenue on marketing. That’s a lot, so be careful to allocate these resources wisely. Monitor the performance of your ad campaigns and confirm they yield results.

   
   

   Give up your office or make it hybrid. You can save a significant portion of your budget if you don’t rent a space and pay utility bills. If you need to meet in person, consider booking a meeting room at a coworking space for a few days a week, as it's a more cost-effective option. Or simply decide which team should work in person and arrange a space for the specific group.

   
   

   You don’t need that many subscriptions. Maybe you don’t need a Zoom subscription if you are already paying for Slack (or just use Google Meet, which is free). See if there’s a way to use free versions of services or a single tool for various purposes.

   
   

5. Choose calls over business trips. In 95% of instances (made it up, but you get the point), your negotiations won't be significantly more successful just because you spend thousands of dollars on a flight, accommodations, and a fancy restaurant dinner.

   Start using cloud computing, analytics tools

   Instead of investing in expensive hardware to store your data, use cloud computing. Since these services operate on a pay-as-you-go or subscription model, you won't be charged for resources you don’t use. This could save you around 20% of your startup’s budget.

   
   

   Investing in data analytics tools is also beneficial for your business's finances. Poor-quality data causes 37% of marketers to waste budget funds, while a lack of supply chain visibility poses the biggest challenge for 84% of chief supply chain officers. Use analytics to interpret your metrics effectively, make data-driven decisions, and reduce costs.

   
   

   Initially, a simple Excel table can suffice for calculating and visualizing data. But when your startup grows and there’s more data, move to more sophisticated tools. It can be Microsoft Power BI, SAS, Apache Spark, Tableau, or Knime. A $9.99/month subscription to these services is never a waste of money.