Valuations for WeWork, Uber, Blue Apron, etc. have been tanking. They all prove that a company’s business service-cost model can’t spend more costs on a unit of activity than the unit’s margin-dollar content, and then make it up on volume.
The same economic reality hit many retail dotcoms back in 2000. Remember eToys? In ’99, they were averaging $20 in margin per order while spending an all-in cost of $300 per order for fulfillment.
“Positive Unit Economics” is Now Cool
(10-3-19) Bird, the electric-scooter company, announced that it had raised another $275MM at a $2.5B valuation, bringing total funding to about $700MM. The CEO stated: “Positive unit economics is the new goal line….we pivoted from growth to unit economics”.
Bird’s smallest building-block, “economic unit” is a rental ride. Here’s what they must do:
- Create a Cost-per-ride (CPR) model to figure a “profit equation” for each ride:
Margin Dollars (less) CPR dollars = Profit/Loss Dollars per ride.
- Add up rides to rank customers, neighborhoods and cities by profitability.
- Determine the root causes behind the hot profit and loss spots.
- Innovate to better feed the profit spots while fixing, exiting and/or avoiding losing spots.
- Finally, aim their new, proprietary capabilities at spots that meet “hot-spot” criteria.
Pushing volume and ignoring variable costs per unit is sub-optimal, if not fatal.
90%+ of Distributors are In Good, Ignorant Company
Like “sophisticated” startups, most distributors don’t have “unit economics” for customers, orders or picks. Those who do, discover shockingly big profit and loss cross-subsidies amongst both customers and SKUs.
But, these insights can start a journey that achieves:
- Customer-centric, service-value improvements for best customers
- Win-win savings solutions for big, losing customers
- A new, profitable service-model for small losing customers
- Increases in personnel productivity and compensation
- Big boosts for sales, profits, and rebates.
Rent or Build Net-Profit Analytics?
Both the threats of, and opportunities for inventing digitally enabled service value and business/channel models are pressing. Building will take longer, cost more, and may be less effective than a monthly subscription service.
So What Next?
Be in touch for a free, initial consultation or a virtual tutorial for your C-suite on “unit economics” for distributors: firstname.lastname@example.org. And, for a roadmap document on what to do with new, net-profit insights: CLICK HERE to download my “Core Renewal Roadmap”.