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VC Analyst · CoreTrack
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The Business EcosystemThe Business ModelStakeholdersThe Business Life CyclePlatform BusinessesHow to Build a…The Value NetworkMonetisationUnit EconomicsThe Profit PoolTake RateB2B vs B2C
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The Revenue ModelRevenue Growth vs Monetisation…Pricing PowerRecurring RevenueAverage Revenue Per UserARPU vs Average Order ValuePrice DiscriminationGross Margin vs Contribution MarginFixed Costs vs Variable Costs
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The Operating ModelThe Value ChainThroughputThe Supply ChainVertical IntegrationVertical vs Horizontal IntegrationProcurementCapacity UtilisationJust-in-Time vs Just-in-Case InventoryMake vs Buy
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Brand EquityCustomer LoyaltyCustomer Segments and the JourneyCustomer EconomicsHow to Analyse Customer…Distribution ChannelsCustomer Acquisition Cost
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InnovationResearch and DevelopmentTechnology Adoption and DiffusionThe Product Life CycleProduct Innovation vs Process InnovationDigital TransformationCannibalisationDisruptive InnovationThe Technology S-Curve
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Corporate and Business Strategy ComparedHow to Build Business…How Execution Risk Can…Organic and Inorganic Growth ComparedGrowth Investment vs Capital ReturnOrganisation Design and TransformationHorizontal vs Conglomerate DiversificationCentralised vs Decentralised OrganisationCompany Research vs Investment ResearchHow to Separate Facts,…
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Customer Economics: What One Buyer Earns, Costs and Repays

Work it yourself

Ten fields in, and every step of the build shown

Every field below is a line copied off a set of statements or a disclosure, not a figure somebody had already worked out. The five in the first group were measured and written down by somebody. The four underneath them were not measured by anybody. They sit apart for that reason, and the panel keeps saying so. The tenth is not a figure at all but a choice about where a cost is charged, and it is there so that the mistake worked through below can be reproduced and its effect on a buyer that is perfectly sound observed. Every division the panel performs is walked through by hand further down. Nothing typed here is kept; closing the tab discards it.

Read off the documents
Income statement, top line.
Operating metrics disclosure, investor deck, or a paragraph of management commentary.
Cost schedule, the lines the volume test kept.
Cost schedule, inside the fixed base line below.
Cost schedule, the lines the volume test rejected.
Nobody measured these. They are chosen.
No document carries it. A cohort study somebody commissions, or an assumption written down.
No document carries it. Whoever builds the figure picks it.
No document carries it. A choice of how far forward to look, from one period to thirty.
Which of the two amounts above the line the ladder repeats. Only one of them survives the costs that move.
Where the spend to win a buyer is charged
Cost schedule. The accounts already carry it once, in the fixed base.
Revenue a buyer
Rs 4,000/-
Contribution a buyer
Rs 2,000/-
Payback on one buyer
3.00 years
Break even buyer count
62,500
Lifetime value, at the chosen horizon
Rs 20,000/-
At these settings one buyer brings in Rs 4,000/-, keeps Rs 2,000/- of it after the costs that move, repays the Rs 6,000/- it cost to win in 3.00 years, and the business needs 62,500 such buyers before contribution covers the fixed base. Over the ten periods set, one buyer is illustrated as leaving Rs 20,000/- behind.
The build on one buyer, at the settings above nothing money leaving money staying Revenue a buyer Rs 4,000/- in less the costs that move Rs 2,000/- out less the spend to win a buyer nothing here, it sits below the line Contribution a buyer Rs 2,000/- left
The ladder, period by period, on the amount chosen to carry forward
PeriodOf 100 buyers, still thereAmount that periodDiscounted to todayRunning total, plainRunning total, discounted
Running total against the spend to win a buyer
Every figure this panel returns is an educational illustration rather than a valuation, a forecast or advice about money. The first four come out of a period that has closed, so two people holding the same statements will get the same four. The lifetime value does not behave that way at all. It is built from a retention rate, a rate for later rupees and a horizon that were chosen rather than measured, and it moves by multiples when any of them changes. The panel computes it so that the movement can be watched, not so that the figure can be quoted.
Every figure belongs to Setu Bazaar and to no trading business. All five measured inputs are assumed to cover the same closed period. Which cost lines move with a buyer is an assumption rather than a disclosure. The ladder shows each row to the nearest whole rupee and every total is the sum of the rows exactly as printed, so the columns add up on the screen. A break even count landing on a fraction is taken up to the next whole buyer, and the panel says so only when that actually happened.

Why can a closed period be divided up at all?

Because every number the division needs has already happened. The rupees came in, the rupees went out, somebody counted the buyers, and all of it was written down beforehand. Because none of these three answers needs a view about next year, anybody holding the same set of statements can check them. Two people handed the same statements should land on the same figures, or find out exactly where they disagreed.

The business being divided up is Setu Bazaar, a marketplace used throughout these notes, and its trading year is set out in full elsewhere in these notes. The Rs 20,00,00,000/- on its top line is what the marketplace kept for itself as its take rateThe share of an order's value that a marketplace keeps as its own revenue, rather than passing on to the seller who supplied the goods. on the orders placed across it, not the value of the goods that moved. The marketplace served 50,000 buyers in the year. Three cost lines moved whenever a buyer arrived. Payment handling accounted for Rs 700/- of that movement, buyer servicing for Rs 500/-, and delivery and returns support for the largest share at Rs 800/-. The costs no single buyer moved came to Rs 12,50,00,000/- for the year. Winning one buyer cost Rs 6,000/-, and that is what a newly won buyer cost rather than a charge laid against all 50,000, most of whom were won in earlier years.

One test decides which costs come out, and the test itself is covered separately. A cost belongs in the per buyer subtraction only if it would have moved had that one buyer never existed. The three named lines pass. The lines inside the Rs 12,50,00,000/- do not. Applying a settled test is a different exercise from building one.

Which four numbers does customer economics need, and where is each one found?

Four, and no more, and the panel above asks for more than four only because it also accepts the things nobody measured. The four come in the order an analyst actually goes looking for them, and the question throughout is always where, never what.

One, revenue for a stated period. Top line of the income statement. Revenue arrives with its reporting periodThe stretch of time a set of statements covers, usually a quarter or a year. Every figure inside them describes that stretch and no other. attached to it. No other input on this list comes with its own dates.

Two, the buyer count. Not on the income statement. Not in the notes. The buyer count sits in an operating metrics disclosure, an investor deck, or a paragraph of management commentary, and it is an operating metricA number a business reports about its activity rather than about its money. No auditor signs it, and the definition behind it is the reporting business's own. rather than an audited figure. Which buyers were counted, and on what rule, is a real question with a real answer, and it is settled in these notes under Average Revenue Per User. The requirement at this step is smaller and firmer: the count used and where it came from are written down.

Three, the costs that move with a buyer. The individual lines are printed, in the cost scheduleThe breakdown behind a single expense total, listing the separate costs that were added together to reach it. The schedule usually sits in the notes rather than on the face of the statement. or in the notes behind it. Which of those lines qualify is printed nowhere. The volume test settles that, not the place the accountant chose to group them.

Four, the spend to win a buyer, together with the fixed base it sits inside. Both come off the same schedule, and they come together on purpose. The spend to win buyers is not a separate pot sitting outside the accounts. The spend is one of the lines inside the Rs 12,50,00,000/-, and on this business it is the largest of them.

One of those four is not printed in the accounts at all, and a second carries a judgement no statement records. Two people working from the same statements can therefore arrive at different answers. Think of working out what one child costs a household. The bank statement exists, so the school fee is not in dispute. The share of the electricity bill is not written anywhere, and two people in the same house will split it differently and both be reasonable.

Where each of the four inputs is found PRINTED IN THE ACCOUNTS 1 Revenue for the period Income statement, top line Rs 20,00,00,000/- 3 The costs that move with a buyer Cost schedule, or the notes behind it Rs 700/-, Rs 800/-, Rs 500/- 4 The fixed base for the period Cost schedule, the lines left over Rs 12,50,00,000/- the spend to win a buyer sits inside it NOT PRINTED IN THE ACCOUNTS 2 The buyer count An operating metrics disclosure, a deck, or a paragraph of commentary 50,000 No auditor signs it, and the rule behind it is somebody's choice 3 Which lines move with a buyer No document carries it. The volume test settles it, and whoever applied the test writes down what they did a judgement, not a disclosure One input is missing from the accounts, and one is a judgement the accounts never record.
The buyer count is nowhere in the accounts and the split between a cost that moves with a buyer and one that does not is nowhere either, which is why two readers with identical statements can produce different answers.
Try it out

Customer economics needs four inputs. Which one of them is not printed anywhere in the accounts?

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How is revenue for one buyer computed?

One division. Rs 20,00,00,000/- of revenue over 50,000 buyers is Rs 4,000/- of revenue a buyer. Then the multiplication runs straight back where the reader can see it done: 50,000 buyers at Rs 4,000/- each returns Rs 20,00,00,000/-. The check takes two seconds and it catches a slipped decimal. A slipped decimal is the single most common thing to go wrong when a figure has seven zeroes behind it.

Field note. The numerator sits on the income statement and the denominator does not, so the count used and the document it came from are recorded in the same place as the answer. Change the counting rule and this figure moves while nothing whatever about any buyer has changed, and a reader who finds a different number later needs to be able to see who counted differently.

Try it out

Setu Bazaar's revenue per buyer is Rs 20,00,00,000/- over 50,000, or Rs 4,000/-. Somebody rebuilds it using a count of only the buyers active in the final month and gets a higher figure. What happened?

How is contribution for one buyer computed?

Start at the Rs 4,000/- and take out the three lines that move. Payment handling takes Rs 700/-. Delivery and returns support takes Rs 800/-. Buyer servicing takes Rs 500/-. The three lines come to Rs 2,000/-, and Rs 2,000/- of contribution is what is left.

The build, one buyer, one periodWhere the line was foundAmount
Revenue a buyerIncome statement top line, divided by the buyer countRs 4,000/-
Less payment handlingCost schedule, and it moves with a buyerRs 700/-
Less delivery and returns supportCost schedule, and it moves with a buyerRs 800/-
Less buyer servicingCost schedule, and it moves with a buyerRs 500/-
The three lines togetherAdded, not disclosed as a totalRs 2,000/-
Contribution a buyerComputed here, printed nowhereRs 2,000/-

Field note, and it is the sharpest one here. The three lines are found in the cost schedule, but the schedule does not say they belong here. The volume test decided that, and somebody equally careful could have decided it otherwise. The split between a cost that moves with a buyer and a cost that does not is an assumption and never a disclosure, so the lines taken are written down the moment they are taken.

There is a second route to the same place. 50,000 buyers multiplied by Rs 2,000/- gives Rs 10,00,00,000/-, the published total contribution for the year. The agreement between the two routes is worth precisely nothing as a test. The same buyer count appears in the division that produced the Rs 2,000/- and in the multiplication that undoes it, so the two cancel and the routes cannot disagree whatever went wrong upstream. The match is an identity, and dressing an identity up as a confirmation is a fault rather than a feature.

Rs 4,000/- of revenue a buyer down to Rs 2,000/- of contribution Rs 4,000/- less Rs 700/- less Rs 800/- less Rs 500/- Rs 2,000/- Revenue a buyer Payment handling Delivery and returns support Buyer servicing Contribution a buyer The three deductions add to Rs 2,000/-, and Rs 2,000/- is what stands at the end.
Rs 700/- of payment handling, Rs 800/- of delivery and returns support and Rs 500/- of buyer servicing come out of the Rs 4,000/-, leaving Rs 2,000/- of contribution from one buyer.
Try it out

Setu Bazaar's contribution a buyer is Rs 2,000/-, and 50,000 buyers times Rs 2,000/- comes to the published Rs 10,00,00,000/- of total contribution. What has that confirmed?

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How long does one buyer take to repay what it cost to win?

Rs 6,000/- was spent to win the buyer. Rs 2,000/- of contribution arrives from that buyer in a year. Rs 6,000/- over Rs 2,000/- a year is 3.00 years. A payback question hands back a length of time. A length of time can be set beside a loan term, a lease, or the notice period on a warehouse. None of those comparisons would work if the answer came back as a rupee amount.

Field note, and this is the placement rule that decides everything downstream. The Rs 6,000/- is found inside the Rs 12,50,00,000/- of fixed cost, where it is the largest single item. The Rs 6,000/- is not inside the Rs 10,00,00,000/- of contribution, and it never was. Contribution counts a buyer that was served across the period. The Rs 6,000/- is paid a single time, at the front, for a buyer that was won. Three correct figures will be added together wrongly unless somebody says where each one sits.

A household knows this without being taught it. Getting a water connection put in costs something once. The water itself costs something every month. Both amounts are real and both were paid, and a single monthly figure built by adding them describes no month that ever happened.

Rs 6,000/- paid once, repaid by Rs 2,000/- a year PAID ONCE Rs 6,000/- to win one buyer at the very start Rs 2,000/- Rs 4,000/- Rs 6,000/- Rs 6,000/- recovered at this level End of year 1 End of year 2 End of year 3 3.00 years The answer is a length of time, and it is never converted into an amount.
Rs 6,000/- of spend to win a buyer is repaid by Rs 2,000/- of contribution arriving in each of three successive years, and the third year is where the dashed line is reached.
Try it out

Setu Bazaar's cost of winning a buyer is Rs 6,000/-. Where does that spend sit?

How many buyers does it take to cover the fixed base?

Another single division, and the answer comes back in heads rather than in rupees. Rs 12,50,00,000/- of fixed costCost the period carries whatever the level of activity, so it does not rise when one more buyer arrives and does not fall when one leaves. over Rs 2,000/- of contribution a buyer is 62,500 buyers. At that count, total contribution and the fixed base are equal.

Field note. The fixed base is found in the cost schedule, as the lines the volume test rejected, and the Rs 2,000/- comes straight out of the build above. The second half of that sentence matters more than it looks. The division inherits every assumption made when the cost lines were classified, so a reader who disagrees with one line in the schedule disagrees with the 62,500 as well.

Then the rounding rule, stated openly and settled before any untidy division arrives. A business gets no cover at all from part of a buyer and stays short until the whole buyer turns up, so a break even count that comes out with a fraction attached is taken up to the next whole buyer. On these figures the rule sits there and does nothing. Rs 12,50,00,000/- divided by Rs 2,000/- lands on 62,500 with no remainder whatever. Nothing was rounded here. The rule is stated because the panel above returns fractions the moment an input changes, and it is real there.

Total contribution meets the fixed base at a count of buyers Fixed base Rs 12,50,00,000/- Total contribution, Rs 2,000/- a buyer 62,500 buyers the two are equal here Setu Bazaar at 50,000 buyers 0 0 50,000 62,500 Buyers in the period
Rs 12,50,00,000/- of fixed cost over Rs 2,000/- of contribution a buyer is 62,500 buyers, and that division lands on a whole buyer with no remainder at all.
Try it out

Setu Bazaar's fixed base is Rs 12,50,00,000/- and each buyer contributes Rs 2,000/- a year. Without scrolling back to the panel, how many buyers does the business need before contribution and fixed cost are equal?

Revenue a buyer
Rs 4,000/-
Contribution a buyer
Rs 2,000/-
Payback on one buyer
3.00 years
Break even buyer count
62,500
At these settings one buyer brings in Rs 4,000/-, keeps Rs 2,000/- of it after the costs that move, repays the Rs 6,000/- it cost to win in 3.00 years, and the business needs 62,500 such buyers before contribution covers the fixed base.
One buyer, at the settings above Rs 2,000/- out Rs 2,000/- left costs that move with a buyer contribution Years until the spend to win a buyer is repaid 0 1 2 3 4 5 6 3.00 years
This box will not price anything. It carries no rate for discounting a future rupee, no rate for how many buyers stay, and no figure for what a buyer is worth, because none of those was measured by anybody and all three would have to be chosen rather than read. It also says nothing about whether the business is a good one.
Educational illustration. Every figure belongs to Setu Bazaar and to no trading business. All five inputs are assumed to cover the same closed period. Which cost lines move with a buyer is an assumption rather than a disclosure. The spend to win a buyer sits inside the fixed base and is never subtracted a second time above the contribution line. A break even count landing on a fraction is taken up to the next whole buyer, and the panel says so only when that actually happened.
Try it out

The published rule is that a break even buyer count landing on a fraction is taken up to the next whole buyer. How does that rule apply to Setu Bazaar's 62,500?

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Where does each cost actually sit?

Placement is where the arithmetic is got wrong in practice, so lay all of it out once. There are three positions and every rupee Setu Bazaar spent occupies exactly one of them. Above the contribution line sit the costs measured on one buyer served: Rs 2,000/- a buyer, or Rs 10,00,00,000/- once the whole year is in view. Below the line sits the fixed base of Rs 12,50,00,000/-, carried by the period whatever happens. Inside that base, not beside it, sits the spend to win buyers. A cost appears exactly once in this arithmetic, and the only question worth asking about any line is which side of the contribution line it falls on.

The fixed base is not divided across the 50,000 buyers to produce a profit for each of them. Spreading it that way is overhead absorptionSpreading costs that no single unit moves across the units anyway, using a chosen rule, so that each unit carries a share of them., it answers a different question, and why every buyer can be profitable while the business as a whole loses money is worked through in these notes under Unit Economics: Profitability at the Level of One Customer. The published result for the year, a loss of Rs 2,50,00,000/-, is quoted once so that the arithmetic can be seen landing where the business itself reported: Rs 10,00,00,000/- of contribution set beside a fixed base of Rs 12,50,00,000/-.

One line, and every cost sits on exactly one side of it ABOVE THE LINE, MEASURED ON ONE BUYER SERVED Revenue a buyer Rs 4,000/- - The three lines that move Rs 700/- + Rs 800/- + Rs 500/- = Rs 2,000/- a buyer = Contribution a buyer Rs 2,000/- Rs 10,00,00,000/- for the period THE CONTRIBUTION LINE nothing below crosses upward BELOW THE LINE, CARRIED BY THE PERIOD AS A WHOLE The fixed base, Rs 12,50,00,000/- The spend to win buyers Rs 6,000/- each, paid once Everything else the period carries whatever is left of the base once that spend is out A cost is counted once, and the only question is which side it falls on.
Every cost in this business sits on exactly one side of the contribution line, and the spend to win buyers sits below it inside the fixed base rather than above it with the three lines that move.
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Why can a rupee, a duration and a count not be combined into one score?

Rs 2,000/- is an amount of money, 3.00 years is a stretch of time, and 62,500 is a number of heads. The three figures came out of the same set of statements and they answer three questions that have nothing in common: what one buyer leaves behind once the costs that follow that buyer around have been paid, how long that buyer has to keep coming back before the money spent winning them is back in the till, and how many buyers there would have to be before the costs nobody's arrival changes are covered. None of the three can be added to, multiplied by or scored against either of the others, and anybody offering a single customer economics score has multiplied a rupee by a year.

The three can also point in different directions at once, and that is not a defect in the arithmetic. A business can hold a healthy Rs 2,000/-, wait a long time to be repaid, and still sit well short of the count it needs. Which of the three a particular reader stops at is a separate question and it is worked through elsewhere in these notes.

Three answers, three units, and nothing that joins them A RUPEE AMOUNT Rs 2,000/- What one buyer leaves behind across one period + A DURATION 3.00 years How long one buyer takes to repay what it cost to win x A COUNT 62,500 How many buyers cover the fixed base for the period There is no fourth number underneath these three. Adding them, multiplying them or weighting them into a score produces nothing that survives being asked what it measures.
The three answers sit in three different units, so none of them can be added to, multiplied by or scored against either of the others without producing a figure that measures nothing.
Try it out

An associate combines Rs 2,000/- of contribution, 3.00 years of payback and 62,500 buyers into a single customer economics score. What is wrong with that?

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What can this arithmetic not settle on its own?

Customer economics says nothing about what a buyer is worth. A worth placed on a buyer, usually called a lifetime value, is the most quoted number in this whole subject. The panel above builds one the moment it is given what it needs. The inputs it needs are the lesson, rather than the number it returns.

Set the two side by side. The payback needs Rs 6,000/- that was already spent and Rs 2,000/- that was already earned, and both of those sit in a period that has closed and been written down. A worth placed on a buyer needs two further things: how long that buyer will keep coming back, which is measured by following a cohortA group of buyers who all started in the same period, tracked forward together so that later joiners never enter the group and dilute what is being observed. of buyers forward and is covered separately in these notes, and a discount rateThe rate used to convert a rupee expected later into a rupee today. Nobody observes it in the accounts; whoever builds the figure has to choose it. to turn rupees expected later into rupees now. Nobody measured either. Somebody has to pick them, and the panel leaves that choice to whoever is working the figures. A duration needs nothing about the future, and a number that requires a forecast is not evidence.

The panel opens on the only retention rate a closed period supports, and that is no rate at all: every buyer returning, no rupee discounted, and ten periods counted. On those settings the ladder is the closed period written out ten times, Rs 2,000/- in each of them, and the lifetime value reads Rs 20,000/-. With twenty in the horizon instead it reads Rs 40,000/-. Nothing about Setu Bazaar moved. The figure doubled because the number of periods counted doubled, and that is the whole of what a lifetime value resting on an unmeasured retention rate can tell anybody.

Now a real assumption. At a retention rate of eighty, meaning eight buyers in ten come back each period, those same ten periods come to Rs 8,925/-. A buyer who leaves stops mattering long before the horizon does, so twenty periods come to Rs 9,883/- and thirty to Rs 9,986/-. Moving the rate from seventy per cent to ninety takes the figure from Rs 6,478/- to Rs 13,027/-, slightly better than double. Every audited number stays exactly where it was. A lifetime value on this business is a statement about the retention rate somebody chose rather than a statement about the business.

There is a second way to inflate it and the panel will do that one too. Switch the amount carried forward from contribution to revenue and the ladder repeats Rs 4,000/- a period instead of Rs 2,000/-, so the opening settings return Rs 40,000/- rather than Rs 20,000/-. The extra Rs 20,000/- is ten periods of the Rs 2,000/- of costs that move, every rupee of which was paid out and never came back. A lifetime value built on revenue counts rupees the business spent as though it had kept them.

No worth for a buyer is reported here, and no price is put on a name a business has built for itself; both are covered separately. In each case the first question is what the arrangement does: what it costs to win a buyer, how much that buyer leaves behind, how long the money takes to come back. Pricing comes later, in a different kind of work, and by different people.

What each figure needs before it can be written down THE 3.00 YEAR PAYBACK NEEDS Rs 6,000/- already spent recorded in the period that closed Rs 2,000/- already earned recorded in that very same period Nothing else at all. One division, and both numbers happened. PUTTING A WORTH ON A BUYER NEEDS How long the buyer stays nobody measured it A rate for later rupees somebody would have to choose one Two assumptions. Neither of them happened. A duration needs nothing about the future.
The payback rests on two amounts that have already been spent and earned, while placing a worth on a buyer rests on two figures nobody measured, which is the whole difference between the two.
Try it out

Why a 3.00 year payback rather than a worth for one buyer?

Customer economics settles payback and not what a buyer is worth. See why.

In what order does a practitioner pin the four inputs down?

Before any of the three answers gets written, four things get settled and written down. The order is not decorative. Each one closes off a way the next reader could get a different number from the same statements.

Four things settled before a single division is done

  1. Name the period, and check that all four inputs cover it. A revenue figure for a full year set against a buyer count taken at one month end is the quietest error on this list, because both numbers are correct and neither looks wrong.
  2. The counting rule behind the buyer count is named, along with where it came from. Anyone who counted differently will land somewhere else, and that argument should be about the rule rather than about the arithmetic.
  3. Name which cost lines passed the volume test and which did not. This is the assumption everything downstream inherits: the contribution, the payback and the break even count all move together if one line changes sides.
  4. Name where the spend to win a buyer sits, and check it has not also been taken out above the line. Say out loud that it sits inside the fixed base and is counted there in full.

The fourth check is the one people skip, and its failure is the only one that is invisible. A cost counted twice looks exactly like a business with worse economics, and nothing in the arithmetic raises a hand. With all four written down, anybody can rebuild the three figures and anybody can dispute them, which is the only property that makes a number worth quoting at all.

The order the four inputs are pinned down in 1 The period every input covers the same stretch 2 The counting rule behind the buyer count and where it came from 3 The cost lines which passed the test and which did not 4 The placement where the spend to win a buyer sits, once only the one people skip Four answers written down, and anybody holding the same statements can rebuild all three figures.
The fourth check is the one people skip, because a cost counted twice looks exactly like a business with worse economics and nothing in the arithmetic catches it.
Cleaning Financial Data — free micro-course from Fin Maverick

Where does this arithmetic go wrong in the hands of a careful reader?

The same rupees charged twice

An associate is asked to build Setu Bazaar's customer economics from the statements. The associate divides Rs 20,00,00,000/- by 50,000 and gets Rs 4,000/-. Out come the three lines that move: Rs 700/- for payment handling, Rs 800/- for delivery and returns support, Rs 500/- for buyer servicing. Rs 2,000/- is left. Then, wanting to be thorough, the associate takes out the Rs 6,000/- it cost to win the buyer as well, on the entirely reasonable ground that winning the buyer really did cost Rs 6,000/- and the money really did leave the business.

The buyer now shows minus Rs 4,000/-. The note goes upstairs saying every buyer Setu Bazaar has loses money. The true position is the exact opposite, and every single figure the associate used was correct.

Here is what went wrong. Contribution counts a buyer that was served across the period, and the Rs 6,000/- was paid once, at the front, for a buyer that was won. The Rs 6,000/- is already sitting inside the Rs 12,50,00,000/- of fixed cost, counted there in full. Taking it out a second time above the contribution line charges the business for the same rupees twice. The right treatment is the one performed above: the spend stays where it sits and is set against the contribution as a length of time, Rs 6,000/- over Rs 2,000/- a year, or 3.00 years.

The cost of the error is a verdict on the wrong thing. Setu Bazaar's buyers work. Its fixed base is the size of its problem, and the note that went upstairs never mentioned the fixed base at all. The fix is one sentence: a cost is counted once, and the only question is which side of the contribution line it falls on.

The working that charges the same Rs 6,000/- twice THE ASSOCIATE'S WORKING Revenue a buyer Rs 4,000/- less payment handling Rs 700/- less delivery and returns support Rs 800/- less buyer servicing Rs 500/- less the cost of winning the buyer Rs 6,000/- Reported result a buyer minus Rs 4,000/- Every figure on this sheet is correct. WHERE IT WAS ALREADY COUNTED The fixed base for the period Rs 12,50,00,000/- The spend to win buyers Rs 6,000/- a buyer, counted in full and counted again on the left A note goes upstairs saying every buyer loses money. The buyer does not. The fixed base is the problem, and the sheet on the left never touched it.
Contribution counts a buyer served across the period while the spend to win one is paid a single time at the front, so taking the Rs 6,000/- out again charges the same rupees twice.
Try it out

An associate subtracts Rs 700/-, Rs 800/-, Rs 500/- and the Rs 6,000/- cost of winning a buyer from Rs 4,000/- of revenue a buyer, reports minus Rs 4,000/- and concludes that every buyer loses money. Every figure used is correct. What went wrong?

India

What does the Indian setting fix here, and what does it leave open?

Two things, and both are conventions rather than rules. Every amount is written in rupees and grouped the Indian way, so Rs 12,50,00,000/- reads as twelve and a half crore, and Setu Bazaar is written as a private limited company trading in India. Beyond that, the arithmetic is the same wherever the reader is standing. The one place a real rule book does sit behind the arithmetic is the line drawn between a cost that moves with activity and a cost that does not. The line is a cost accounting question before it is an analytical one, and which businesses are required to keep records of that kind changes from time to time. The Institute of Chartered Accountants of India holds the current position on thresholds, rates, classes of company and dates.

Cleaning Financial Data teaches you to find the errors that survive every check and break every model.

Which questions belong to other work?

Customer economics builds three figures for one buyer out of a period that has closed, and it stops there. A worth for a buyer, and a rate for turning later rupees into present ones, both rest on somebody's choice, and the panel above says so on every line. Whether any business is a good one to hold is a separate question. Customer economics stops at how a business runs, and what a business is worth is taken up separately.

How long a buyer stays, and what keeping one is worth, is covered under Customer Loyalty: Retention as an Economic Asset. Building the Rs 6,000/-, and why two honest teams would build it differently, is covered under Customer Acquisition Cost: What It Costs to Win One Buyer. Why every buyer can be profitable while the business as a whole loses money is covered under Unit Economics: Profitability at the Level of One Customer. Which buyer count belongs in a denominator is settled under Average Revenue Per User. Sorting buyers into groups, and judging whether one customer is too large a share of anything, is a different exercise again.

What a business should spend, where it should spend it, and which buyers it should chase are decisions rather than arithmetic, and no division performed on a closed period produces them.

What stands behind the numbers divided here?

Where it was readWhat was read from itSiteWhen read
These notes, Business Fundamentals and ModelsSetu Bazaar's revenue for the year, its buyer count, the three cost lines that move with a buyer, its fixed base, the price it paid to win a buyer and its result for the yearfinmaverick.com23 August 2026
These notes, Revenue and PricingThat the Rs 20,00,00,000/- on the top line is what the marketplace kept for itself and not the value of the goods that crossed itfinmaverick.com23 August 2026
These notes, Average Revenue Per UserThat a buyer count rests on a counting rule somebody chose, which is why the rule used is written down alongside the answerfinmaverick.com23 August 2026
The Institute of Chartered Accountants of IndiaWhere a reader goes for the actual position on classifying and recording costsicai.org23 August 2026

Setu Bazaar is invented.
Educational material. Not advice on any investment, tax, budget or market position.

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