Can You Imagine Making a Buck?

Where I start: Unit Economics

Seems to me that one of the first questions you should ask yourself when you've got a product idea is "Any way I can make a penny on this?"

It's a useful way to triage the tons of ideas that come along and it's more or less the first tool I reach for: If I can't conceive of circumstances where the idea makes at least a penny on a unit basis  then it's a pretty strong signal that the idea needs to be reconsidered.

This approach clearly has limitations and can give a false sense of certainty but it's a useful smell test.

Case in point: My uncle's app concept.

My Uncle Mark is a great guy and an experienced businessman. A Red Lobster years ago, rental properties more recently, etc. A couple weeks ago he emailed with an app idea and asked (in so many words): "Am I crazy?" I sidestepped the question of his sanity but answered the question of whether he's got a good business idea on his hands with a little unit economics thought experiement.

Here's the important part of his email and my reply. (NB: I got his permission to "give away" his idea to all 50 of my readers!):

Consider:   I thought of what I think may be a great "ap".  Called "Do I have a case?.com". We create several teams of attorneys knowledgeable in different fields of law. People wanting to know if they should persue a law suit hit the ap and our team gives the pro and cons of their issue. We do not give legal advice per se but recommend they consult an attorney or tell them why not. We can provide names of attorneys near them who pay us  to be on our list.
Don't know if it's a good ideas or even legal but am I crazy?  Burn this message after reading and remember. Lose lips, sink ships".
Love. Uncle.    Think on it.  Oh yes, $10.99 for our service.

My reply:

Yo!

Sorry to take so long but here's how I'd think about this:

What's the cost to acquire each plaintiff? Let's call this the "customer acquisition cost" (CAC).

What does it cost to service each plaintiff?

How much will you earn from the plaintiff? Let's call this their "lifetime value" (LTV).

CAC calculation:

  • Let's say you decide do advertise on Google and bid to be displayed as an ad whenever someone types "i want to sue" (or variations). My guess is that those are very competitive terms and the "cost per click" (i.e., the amount you'd pay to Google each time someone clicks on your ad) would be at least $10.

  • Not everyone who clicks on the ad will actually convert into a paying customer but let's assume that 25% do. (This would be very optimistic). With these numbers you're paying $40 per customer.

Service costs:

  • Let's assume that you get a bunch of very crappy lawyers who are willing to work for $50/hour and the analysis of each claim take one hour.

  • Now we're up to $90 out of pocket for each customer.

LTV:

  • Everyone pays $10. Nice! We still need to make $80/customer to break even.

  • Assume that 25% of the cases are viable and are worth referring to an actual lawyer who has agreed to pay you for qualified leads. Those lawyers would have to be willing to pay you at least $320/lead to pay for the costs associated with that lead.

  • Question: How much are lawyers willing to pay for qualified leads? 

It gets more complicated (and expensive): You have to actually build and maintain the app, offer customer service, pay overhead (probably you'd want some sort of insurance), AND you'd need a salesforce to sell those qualified leads to attorneys.

So you'd need to be bringing in enough money to both cover the $320 it cost you find a lead PLUS those other fixed costs.

My intuition is that this might be a useful app but it'd be a very tough business to make work. That said, it's impossible to really know without having a better sense of the actual numbers.

Thanks for the fun thought experiment!

Icon credit: Dan Hetteix