Ratzfatz: The right way to deal with unit economics #DHDL

Maraike Höhne, Sarina Morawiak and Luisa Schubert present Ratzfatz, a new product category, in the first episode of the anniversary season of ‘Die Höhle der Löwen’: Their start-up offers healthy frozen ready meals for children to take the strain off parents in their everyday lives despite the high demands placed on their children’s diet. The lions were enthusiastic about the founders, despite a very critical discussion about important key figures.

Many founders still think that investor talks can be successfully concluded primarily through detailed financial planning. This is why they often create sheer monsters of spreadsheets that never seem to come to an end. However, these are often not really appreciated by the investors and the disappointment after all the work is great.

This is because the problem is often that the information that the funders are really looking for is hardly or not at all contained in these plans. And the masses of financial planning templates available online, which are completely unsuitable for negotiations with professional investors, make things even worse.

As the founders in ‘Die Höhle der Löwen’ cannot bring any spreadsheets with them, it is often very easy to follow the real discussion about the figures – and sometimes also to observe very closely what investors are really concerned with when it comes to the company figures.

In the case of ‘Ratzfatz’, this became very clear, as lion Carsten Maschmeyer in particular led a detailed discussion about unit economics. This ‘economics of units’ reveals the most important part of a business model, as it answers the question of whether it is possible to earn money at all – at the smallest level.

At the time the programme was recorded, the start-up was selling its ready meals for children exclusively online. Naturally, the lions quickly enquired about the sales price of €6.99 and the production costs of €2.37 per pack. These figures also count as unit economics, as they relate to a single product unit. It is therefore a matter of looking at a unit and, if necessary, ‘down-calculating’ other values to this unit.

But let’s stay with the sales and purchase price first. This results in a margin of €4.62 per product. However, Carsten Maschmeyer seems to be directly sceptical as to whether this is enough for such a frozen product, as this does not include the refrigerated shipping.

We quickly learn that each parcel sent costs €20, of which only €5 is passed on to customers as shipping costs. Of course, it immediately becomes clear that shipping a single package would mean a huge loss for the start-up. That’s why the lion immediately asks for a minimum order value, which the founders answer with €30.

And this is where a small but important shift in the discussion takes place: the reference value, i.e. the ‘unit’, changes. The individual product is no longer used as the smallest unit, but the individual order now forms the basis of the discussion. The reason for this is simply that the €20 frozen food shipping costs relate to the entire parcel – regardless of whether you are sending just one or 10 packs.

With a minimum order value of €30, at least 5 packs must be ordered. This means that the start-up receives at least 5 times its margin for each order, i.e. initially earns €23.10, of which €15 must be subsidised for shipping. This means that only €8.10 remains with the startup for an order with a minimum order quantity, which explains the subsequent exchange of words between Carsten Maschmeyer and the startup team.

The financial lion concludes from the figures mentioned that Ratzfatz online is doing a loss-making business, which the founders agree with if they include marketing. After all, €8.10 is not normally enough to win over a customer in this sector.

Although the founders subsequently emphasise that they already have an average shopping basket of €42, the correspondingly improved value of €12.72 is still far from covering the average marketing costs.

Although these are no longer explicitly mentioned in the episode, the Ratzfatz team provides important information here: from a shopping basket value of €60-70, it should be possible to scale the online business, i.e. the margin should cover both marketing and shipping costs. At €63, you would therefore have 9 packages sold, a margin of €41.58, i.e. €26.58 minus the €15 shipping allowance, which could be spent on marketing without ‘paying extra’.

Of course, you could analyse the unit economics even further at this point and perhaps change the reference value from the order to the customer again, because after all, the customer could order again several times, but the marketing costs are only ever incurred once.

However, the discussion takes a different direction at this point – at least in the shortened version of the broadcast – and the founders skilfully emphasise both the opportunities in retail and in the B2B sector with deliveries to facilities such as hospitals, day-care centres or nurseries. Here, of course, the expensive individual logistics costs are eliminated, so that business with larger quantities can become more attractive. Even if you then probably have to sell for a lower price.

However, the founders are very confident throughout the discussion, never fail to answer questions and seem to have a clear vision for their business.

This impresses the lions, so that – although he initially pulls out – even Carsten Maschmeyer joins Janna Ensthaler in an offer. The lions are enthusiastic about the founding team, praising their complementary backgrounds and expertise – to which their numerical certainty has probably once again contributed.

In the end, the founders decide in favour of the competing offer from Nils Glagau and Tillmann Schulz.

They will probably have needed a spreadsheet in the next stage of the investment negotiations – but one that clearly shows the interplay and unit economics of the various sales channels.

These founders are certainly not working with a template from the Internet that is useless for investors.

Photo (above): TVNOW / Bernd-Michael Maurer