Assessing the profitability of your operations can be challenging. Here's how unit economics can help build a sustainable micromobility business.
Before you started your operations, you will have had to work out your CAPEX, OPEX and Total Cost of Ownership (TCO).
When you get to the early stages of the operating phase, however, you will need to focus on unit economics to assess the profitability of your operations. It’s important because lots of businesses focus on growth over profitability, which doesn’t create a sustainable business - as we will see with Uber a little later on.
There are two traditional ways to calculate your unit economics:
- Per unit
- Per customer
Per unit tells a business how much profit they make per item sold (cups of coffee, airline seats). Every industry has their own calculation. Per customer, as the name suggests, tells a business how much profit they generate per customer.
In micromobility, you will need a mix of both methods to assess your success.
You will also need to measure lifetime value and churn rate, all of which will be explained in this article!
Let’s dive right in.
Method #1: per unit
Why is it important?
A ‘per unit’ calculation identifies areas for improvement and evaluates the return on investment on hardware (i.e. how long you need to wait before you break even on your initial investment in the bike) In doing so, you can estimate whether your operations will be sustainable in the long run.
“I…realized how important it is to focus on profitability per asset in order to build a sustainable business”.
- Driss Ibenmansour, CEO of Bloom
In micromobility, per unit is usually to do with the vehicles or the associated ridership. This can be any of the following:
- Per trip = revenue - costs
- Rides/time period = revenue/hour - costs/hour
- Per vehicle/time period = revenue per vehicle per day - daily costs
Variations on time period would also work, however hours or days are usually best.
Uber uses the second one. They judge profit as bringing in more revenue per hour than their costs per hour, including incentives given, operating expenses, deliveries etc.
Revenue per hour isn’t necessarily the best method for micromobility operators. It also focuses on short term gains and reduces the focus on the lifespan of hardware, which is not a green way of thinking. ‘Profitability per asset’, as Driss refers to, needs to take into consideration the key asset: the vehicle.
Let’s look at an example of a per unit calculation with the vehicle as the ‘unit’.
A fictional company operates a fleet of 500 electric bikes in Berlin. Here is a breakdown of their revenue and their costs per bike per day for one financial quarter.
This tells the company how much they are making per vehicle in their fleet on a daily basis.
Please note that there’s one part missing from this calculation: the capital investment (CAPEX) to acquire the vehicles, which should be part of a larger EBITDA calculation. Depreciation is also important but, in the interest of simplifying the calculation, we have left that out here.
If you are in the green at this point, this is a good sign! If not, well, we’ll get to that after we look at method two.
Method #2: per customer
Why is it important?
This method is crucial for subscription-based businesses, such as Netflix, to calculate the lifetime value (LTV) of their customers. It is important for micromobility companies too because, even if customers are not part of a subscription plan, they need to keep them coming back as often as possible to complete repeat purchases (rides).
This metric has grown in importance over the last couple of years, not least because micromobility players are also entering the world of subscriptions.
In micromobility, an LTV calculation looks something like this:
+ Repeat purchases over a lifetime
- cost of services provided (cost of a trip multiplied by number of trips over a user’s lifetime)
= User LTV
In micromobility, it’s hard to pinpoint the end of a user’s ‘lifetime’. For this calculation, it could be worth estimating this as the average moment in time where people take a trip and don’t take another for the following two months. Of course, a user can come back at any moment, especially with the wealth of external factors (e.g. seasonality, Covid) at play.
Then there’s the subscription aspect of the To calculate the LTV of your subscribers, you can use the following calculation:
+ Length of subscription
- Cost of services provided (total costs divided by the number of users (as it’s a shared service)
= User LTV
This calculation will help you determine the effectiveness of your subscriptions. Tracking this over time will allow you to determine whether your subscriptions are becoming more or less effective at retaining customers.
What does it mean if you are not profitable?
The North Star for operators: profitability. We know that it can be achieved, but it’s a challenge. Let’s take a look at Uber. Below is their per-trip unit economics from 2018.
As you can see, they are not profitable. This means that, essentially, Uber are running 'a discounted ride-hailing service', and have had to pursue other revenue streams such as food delivery to reach profitability. As of June 2021, they have released an ‘Uber Pass’ subscription that allows users to have discounts on rides, free delivery on food orders and more.
They have just announced that they will be in the green in 2020, but only when using an adjusted EBITDA definition with 12 different categories of exclusion!
Simply put, an operation that is not profitable (when costs grow proportionally to ridership) is not sustainable. There are many reasons why this could be the case, and we have listed several challenges below with some guidance towards solving said challenges.
- High battery charging costs -> Reduce battery charging costs
- Inefficient rebalancing -> Smarter rebalancing, or less of it
- Underperforming hardware (not built-to-last, too many maintenance operations) -> Invest in high-quality vehicles
- Low daily ridership per vehicle -> Too many vehicles (not enough available/in the right places/weather/seasonality?
- Poor customer service -> Invest in providing better care
- Low monthly value -> Improve marketing/retention efforts
- Sporadic purchases -> Evangelise/incentivize/improve subscription models
- Short customer lifetime -> Improve engagement & user experience
Because of the unpredictability of running a ride-sharing operation, unit economics and user LTV calculations should be used as a means of understanding the success of your operations: to find what’s working well and where you can reduce costs, to create a more engaged user base and map a path towards profitability.
Costs are mostly conditioned by the very early choices of an operator: the size of an operating area, the choice of city (high/low rate of vandalism), the resilience of their hardware and the decision between stations and free-floating.
These are all important considerations before operating a service.