We don’t know how exactly the world around us will change but we do know that it will. The business environment around us will change, and we will have to adapt.
Escape room owners will have to continue making decisions. Resources are very limited, and each of this decision will have a higher impact on the business and therefore will require more planning.
Unit economics is one of the best business planning tools I know. It is used by almost every technology company in the world, but it can also be applied to escape rooms.
You can answer some of the very important questions like:
- Should I start advertising?
- What should be the price of my escape room?
- Where should I cut costs first?
- How much can I spend on marketing?
- Which of my advertising channels is more effective?
- I started advertising and my profit decreased. Why?
- What happens if I stop advertising completely
- Why am I making no profit?
- I want to double my profit. What is the most obvious way to do it?
Unit economics is a multi-variable model, which allows you to see dependencies, apply different scenarios, and ask what-if questions. The best thing is that you will know the result before you make the decisions.
There is no ultimate definition of each term like COGS, ARPU, ARPPU etc, so I am using my version of it. Feel free to modify according to your needs.
Why is this important now?
Average businesses fail.
If you pay the average rent, located in average space, you pay average salary (for the industry), advertise with average budgets, using the same channels, have average quality room and provide an average customer service most likely your business will fail.
In order to be successful in the new environment, you might have to adapt, and it might feel different from what you used to do. Here is what I think the new environment will look like:
- People will have smaller disposable income
- Fewer tourists
- Rent will probably decrease
- Easier to find part-time employees
- Advertising will be cheaper
- More things are done online
You might need to change your target audience, move to another location, or change to online business (as we have seen many escape rooms have done during the lockdown).
Unit economics is a powerful analytics framework which helps understanding business health. It is not a replacement for accounting, it is an additional layer which allows you to quickly understanding the health of your business.
What is a unit?
Unit is something your business is built around. For example, for Saas companies unit is most often a user. For e-commerce, it might be a transaction. For escape rooms I prefer to define a unit as one booking. For US rooms this means that one slot can be accountable for several units, for the rest of the world one unit = one slot. It is relatively easy to understand the average value of one unit by dividing the total monthly revenue by the number of slots played this month (or the number of groups for US rooms).
This simplifies calculations and assumptions, but for our purposes this is ok.
Unit economics usually involves calculation of client LTV (life-time value). However, in our calculations below I deliberately do not use LTV, as our data shows that average escape room players play only once per year, and in order to calculate it properly you need statics from several years. Instead I am using the monthly repeat purchase rate, which is very easy to calculate (see below).
All further calculations are done in USD, and are for example only. Feel free to substitute your own currency and number using the template.
Let’s assume that our fixed monthly costs are rent, salaries and tax, and a loan payment. Please note that salaries in fixed costs are salaries which you pay regardless of whether there are any games – like director salary. You would also have to add here things like software payments, insurance, accounting, etc.
Feel free to modify it in the template
Variable costs are also called COGS – costs of goods sold. These are the costs associated with production of each unit, or in our case with conducting each game. We will simplify this and assume that our variable costs consist of GameMaster’s hourly salary and room maintenance.
If your GameMaster has fixed monthly salary, then it would be part of the fixed costs.
There is a common mistake to do unit economics analysis for all advertising channels together. This is wrong. You have to calculate each advertising channel separately, we are going to do this below.
These are the clients we are getting for free. They find out about you through the word of mouth, forums, tripadvisor, etc. The most important is that you don’t pay for these clients.
When you open up your escape room often you get an inflow of free clients – these are the people interested to try the new activity in their area, or enthusiasts eager to play a new room. Many of the escape rooms have naturally been receiving most of their clients for free, and had no marketing spend.
The problem with free clients is that you have no direct control over the number of clients. It is extremely hard to grow the number of free clients, especially when the competition (supply) increases, while the number of clients(demand) stays the same.
One of the most effective way to grow the number of free clients is by providing an outstanding experience, but I am sure you already know this. If you want to know more, read this post about marketing
There are many ways you can get paid clients, and we have discussed many of them on this blog. It’s important to understand that there is competition within each marketing channel, and the more obvious is the channel, the more competition there is. You are not just competing with other escape rooms, but you are competing with other advertisers advertising to the same audience.
There is only two ways to beat the marketing channel competition:
- You can afford to bid higher than competitors.
- You use unpopular or not obvious advertising channels. Unpopular does not mean not effective. It means it is not being used by your competitors.
In all other cases you have no advantage over your competitors and you are getting the clients at the same price as they are.
For the purpose of this blog post I will concentrate on two advertising channels only, for example Google Ads and Facebook. You can add as many channels as you need in the template.
Lets assume we are only getting free clients. We will ignore walk-ins and phone reservations and will concentrate on website sales only. We are getting 5000 website visitors each month. 2% of them (100 clients) actually book a game. On average the booking price is $100. In one month on average we get 110 bookings (some people book twice), therefore our repeat purchase rate is 1.1. Let’s put this information into a spreadsheet along with some additional calculations.
As you can see we are loosing $250 each month. Let’s add a new advertising channel – Google ads. We will assume, that we spend $5000 per month on this channel, the click price is 1$ and therefore we get 5000 paid visitors onto our website. The rest of the data is the same as with free clients.
Thanks to advertising our profit is now $3000. Let’s continue advertising and add Facebook. Again, we will spend $5000, click price is $1. and we will get another 5000 visitors onto our website. Things are going well, and we are sold out every weekend. Only this time because we are sold out every weekend many visitors realise that the time slot they wanted to book (for example Friday evening in two weeks) has already been booked, and they go somewhere else. As a result our conversion ratio drops from 2% to 1.5% in ALL CHANNELS.
As a result our profit decreases to $63. So in this case adding another advertising channel was not a good decision.
- Which of my channels are most effective, and which are the least?
- What happens if I switch off one or several marketing channels?
- Which parameter should I work on in order to increase my profit – number of users, conversion ratio or price? (Answer – it is probably the conversion ratio).
- What happens if I increase GM’s salary?
And many others.
Provide your email and we will send you a link to google sheet.
Select File -> Make a copy to copy the sheet into your google drive.