Anton Radion
The value of digital health is estimated in billions, andatient demand in the healthcare industry is rising. From big data in healthcare to wearables to EHRs, health innovation is a huge business that is moving at a breakneck pace. Health IoT, healthcare analytics, telemedicine, and digital therapeutics are examples of digital health companies that use technology to increase service quality and outcomes in healthcare.
What Is Unit Economics for Healthcare Startups?
Economics in healthcare works on the basic supply and demand models. The principles of health economics, such as scarcity, demand, supply, opportunity cost, margins, etc. assist in analyzing healthcare.
According to the unit economics definition, the direct per-unit costs and profits are associated with a business model. Any quantifiable object that adds value to a company is referred to as a unit.
In the telemedicine industry, unit economics is a basic but effective method that can help to grasp the growth and long-term viability of healthcare startups. Whether you are the CEO or the co-founder of a digital health company, the unit economics model, when combined with total cash flow and total sales, can be used to assess the success of a startup and prepare for its financial future.
Calculating Unit Economics
The first step is to define one unit to calculate unit economics. The number of customers or clients varies depending on the market and business model, but it is usually one. Unit economics is centered on a ratio of two measures – LTV and CAC.
How to Calculate LTV?
Customer Lifetime Value (LTV) estimates how much a business gets from a customer throughout their relationship before they churn. The LTV calculation for a healthcare startup is as follows:
LTV = Average value of appointment x average annual appointments x average visiting years
How to Calculate CAC?
Customer Acquisition Cost (CAC) is a measurement of how much it costs to get in a new customer. A simple calculation method of CAC is as follows:
CAC = Total marketing cost for acquiring customers (not regular customers) / Total customers acquired
LTV to CAC Ratio
During the unit economics analysis, take into focus LTV, CAC, and the ratio between them. An ideal ratio to aim for is 3:1, through which you would receive the acquisition value thrice from each new patient or telehealth customer.
If the ratio is smaller, it means it costs you the same amount to obtain a service purchaser that they spend on digital healthcare service. If this is the case, you should consider ways to improve your revenue, procurement, and pricing strategies.
A ratio higher than 3:1 would mean a loss on important opportunities for you. Since each user is worth more to your startup than the expense of onboarding them, you can devote more time and resources to sales and marketing.
Unit Profitability
The unit economics metrics also include information about unit profitability, which is known as profit per unit. It investigates the connection between LTV and CAC. You can calculate unit profitability using the formula below:
Unit profitability = LTV – CAC
The unit profitability could improve as CAC declines and LTV increases resulting in higher gross profit margins. You can conduct a unit economics analysis by considering the unit profitability or other financial elements of your healthcare startup.
For instance, consider the payback time, gross margins, and ROI (Return On Investment) of the sales and marketing activities. Those could differ depending on whether you have a service or product market, cash flow, whether the company is still in the initial stages, long-term goals, etc.
Importance of Unit Economics in Early-Stage Startups
Here are some reasons why to calculate unit economics at the beginning of the startup development:
Early Monitoring
The sooner you start monitoring unit economics for your early-stage digital healthcare startup, the higher your chances of finding a solid foothold in the telemedicine industry and reaching a stable growth curve would be.
Detecting Possible Reasons for Startup Failing
Startup founders may be unnecessarily enthusiastic about their company’s concept. One of the most common startup killers revolves around the idea that if you create it, buyers will arrive. Often healthcare startups fail to consider the digital health product – market compatibility, price policy, expense structure aligned with their business model, consumer retention, and bookkeeping before launching. Both of these causes, if overlooked, will lead to the failure of the startup when funds run out.
Preventing Failure
Understanding unit economics early on allows you to make more precise long-term financial forecasts that estimate your sales trend. It would be best if you had a healthy growth rate at this point along with being successful.
You may develop your startup flawlessly and still be faced with a strain on profit margins. With the application of unit economics for startups in their early stages, company heads and owners can track, develop, and sync their digital health services with a sustainable path.
Specifics of Unit Economics in Healthcare Startups
Here are some specifics you should consider in healthcare startups:
Customers in Healthcare
The monetization approach determines the validity of each definition. Such indicators quantify how much the healthcare startup must pay to bring a new user onto the network. Founders should spend time deciding which concept of “customer” would include the most useful information. In the telemedicine setting, a customer can install a health application, a user can subscribe to digital health services, etc.
Acquisition Expense in Healthcare
There may be many different types of users on your healthcare network, each with a different LTV. While the broadest possible description of acquisition expense is a valuable statistic to monitor, granular statistics can be supplemented by offering detailed visibility into specific customer-focused marketing strategies and consumer types. They may include shipping healthcare wearable, considering sales taxes on healthcare devices or services, preparing a site, installing healthcare services, and testing the products.
Who to Carry Out Regular Evaluation
Not only is unit economics important, but it should also be maintained, particularly for early-stage healthcare startups. Becoming mindful of the actual sales and expenses associated with their business plan is a must-have perspective into their financial success.
Early-stage telehealth startups can better focus on their organization as it evolves, scales, and grows by using the unit economics approach to the market. Unit economics will help you spot opportunities, control cash flow, and solve many of the difficulties of scaling a SaaS company.
Conclusion
When you’re applying for funding as a startup, it’s normal to want a foolproof financial submission. Always look up the economic system in your country. For instance, a simple Google search “what is the economic system in the United States” would help you in understanding and making better decisions. Consider the basics of unit economics and conclude by taking on the more technical aspects of a telehealth startup company. The entire project could collapse if the frameworks aren’t stable.
When you view your company from a unit economics perspective, you gain more insight into the present state, concrete growth, and scalability forecasts. You obtain the actual sales and expenses per product, and they can give you a lot of information about your margin. So, in the telemedicine market, relying on these financial numbers will help you fight the odds and succeed.
24 May 2021
WRITTEN BY
Anton is a financial officer with many years of experience and value-driven vision of disruptive technology. As a CFO at Smart IT, Anton has vast insights into financial aspects of businesses and technology. Not to mention, his strategic and tactical expertise related to long-term business and financial planning. [email protected]
