Hi friends,

Last week we looked at the role of AI in therapy. It’s a hot topic with some very important questions. If you missed it, you can check it out here.

But today, we’re focusing on one of the hardest nuts to crack for any mental health business… Unit economics.

People start mental health businesses because they want to create impact at scale. Well, the people who read this newsletter do anyway… Impact is extremely important for you all. It is for me too. But if our solutions aren’t financially sustainable, we can never create impact at scale.

One of the core challenges in achieving this financial sustainability lies in the unit economics of your business. The fact is that most MH businesses have poor unit economics and that’s often what holds them back. It holds them back from selling to more customers, attracting more users and also in attracting investment from VCs.

I wanted to dive into this topic and teamed up with the folks at OneMind to do so.

OneMind is a non-profit organisation focused on using science, business and media to transform the world’s mental health - pretty cool right?

They also run an accelerator through which they invest in mental health businesses (including companies like Amae Health and Options MD which was recently acquired by Resilience Lab). I like them because they have great access to a wide range of mental health businesses and as a result, deep experience in the commercial realities of building trying to build in this space.

So I caught up with Carmine di Maro, Executive Director at OneMind Accelerator to discuss what leaders should be thinking about if they want to build financially sustainable businesses, attract capital and deliver impact at scale.

We cover;

• Why Unit Economics matter for Mental Health businesses

• The Unit Economics you should measure

• Commons mistakes Mental Health businesses make with unit economics

• The unique challenges to Unit Economics in the Mental Health market

• Strategies to improve your Unit Economics

• Future trends impacting Unit Economics in Mental Health

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We’ve got our next THR Pro meet-up happening on February 5th. We’ll be discussing the future of physical spaces in mental health and healing, a topic I’m fascinated by. If you’re not already a member, you can sign up here to get an invite to the meet-up.

As a THR Pro member, you’ll also get access to additional insights and data each month, including my most recent deep-dives on whether AI will lead to the unbundling of therapy and The Eight Major Trends Shaping the Mental Health Tech Industry in 2024.

For mental health startups, mastering unit economics can mean the difference between long-term success and premature failure. So let’s explore why unit economics matter, the key metrics involved, and some strategies you can implement to improve your unit economics and achieve financial sustainability.

First, we’ll get the basics out of the way, then we’ll dive deeper into the trends and tangible strategies you can implement to improve…

Why Unit Economics matter for Mental Health businesses

Your unit economics refers to the direct revenue and costs associated with a single unit of the product or service you provide. In mental health, that unit is usually an individual patient/user, but could also be another unit like an individual therapy session.

Good unit economics are the building blocks of your business. If you make money on each unit you sell, you have the potential to scale your business. If you lose money on each unit, the more you scale, the more you’ll lose. Simple.

Not only is it crucial to the financial sustainability of your business, but it’s also crucial for raising investment.

Carmine reminded me that today, VCs are more concerned with unit economics than ever. During peak periods of venture investment, like the recent ZIRP era, unit economics took a back seat to exciting visions and charismatic founders. But after many high-profile, unit economics-driven downfalls, investors are looking for businesses that make money on a unit-by-unit basis. Companies like Uber, Blue Apron and WeWork all struggled to build business models that generated a profit at a price point acceptable to the consumer. In healthcare, these issues can be even more pronounced.

In this context, strong unit economics not only attract investors but also ensure operational efficiency, long-term viability and the ability to impact more people.

Let’s look at the example of Therapy platforms in mental health. Unit economics are a significant challenge in this market. On the cost side, providing specialized services from skilled providers is expensive and is directly tied to the labor of those providers - there is no leverage on their time and cost. Acquisition costs are also high, with businesses having to pay to acquire both payers and clients.

On the revenue side the often paltry reimbursement rates for behavioral health services, coupled with low retention rates mean there is little margin for error (forgive the pun).

The delicate dance in mental health is that the people providing care need to be highly skilled and compensated accordingly. Patients want to receive high-quality care in a timely manner, but a price they’re willing to pay. Being aware of the important unit economic metrics and having a plan for optimizing them allows founders to find the optimal mix between making their service available to as many patients as possible, whilst still ensuring proftiaility. This optimal mix allows businesses to deliver impact at scale (and attract the attention of investors along the way).

The Unit Economics you should measure in Mental Health

They’re pretty much the same as any business, but let’s briefly cover the metrics you must be tracking.

• Lifetime Value (LTV): LTV measures the total gross margin generated from a customer over their lifetime. For instance, a digital therapy subscription model charging $100/month, with 80% gross margin, will deliver $80 of gross margin per month. With an average customer retention of 15 months, that yields an LTV of $1,200.

• Customer Acquisition Cost (CAC): CAC represents the cost of acquiring a new user or patient. Mental health startups often rely on direct-to-consumer marketing, partnerships with employers, or healthcare provider collaborations. For example, a teletherapy startup might spend $200 per new user through social media ads. You need to account for all costs required to acquire a new patient however. If working with employers or health plans, the cost to acquire those payers needs to be incorporated into your CAC.

• LTV:CAC. This is the gold standard in unit economics. A strong LTV:CAC (anything above 3:1 is excellent) demonstrates that you will make money on every new user you acquire.

• Gross Margin: Gross margin highlights the profitability of services after subtracting delivery costs. A digital mental health app offering self-guided cognitive behavioral therapy might have gross margins of 70%, compared to 30% for an in-person clinic with higher operational costs.

• Churn Rate: High churn rates can significantly impact LTV and sustainability. For example, a meditation app with a 20% monthly churn may struggle to recoup its CAC compared to a high-touch care platform with only 5% churn.

• Payback Period: This metric measures how quickly a company recovers its CAC. A startup with a $150 CAC and monthly revenue of $50 per user achieves payback in three months. A short payback period is not only good for your P&L, but also for your cashflow.

Commons mistakes Mental Health businesses make with unit economics

To improve unit economics, you first need to be completely honest about the current state of your product. However, businesses often make a few mistakes in their calculations and projections that lead to a false sense of reality. This restricts them in the long term and puts off investors.

• Underrepesenting costs. CAC should include ALL costs needed to acquire a new customer. The acquisition cost of a new user from a paid channel is not just the budget you spent on Meta or Google, it’s the cost of the agency you used to manage that platform, the cost of the creative, the costs of your marketing team, all apportioned to the acquisition of that user.

• Overestimating LTV with hopeful assumptions. Until you have a few years of real customer data, LTV calculations will be based on assumptions. This will include assumptions on churn, engagement and pricing. Most assumptions built into these models tend to be overly optimistic. You are much better off being realistic, even pessimistic about these assumptions. Think you need to show better numbers to impress investors? Any investor worth having on your cap table will see through your optimistic assumptions. They’ll calculate the real LTV they expect and will now also think you don't have a good handle on your own numbers (or even worse, that you’re trying to deceive them).

• Assuming they will improve with scale. “Oh, the unit economics aren’t great today, but they will improve as we scale”. I hear that a lot. This might be true, but you need to convince me why. If you make hardware, then as your order quantity with your manufacturers increases, it’s reasonable to expect costs per unit to decrease. I buy that. But if you’re a therapy provider, why would your unit costs decrease as you get bigger? Be honest with yourself about the components of your unit costs and revenue and project accordingly. To do this, I strongly recommend getting real benchmarks from the market.

• Scaling before fixing unit economics. Growth is always tempting. But you need to sort your unit economics before you invest in scaling. If you have a machine that spits out 90c every time you put in a $1, you wouldn’t be throwing cash into it. Sort your unit economics now.

• Not adjusting your business model to the realities of your unit economics. Not every successful business has great gross margins. Car companies have gross margins as low as 12%, and many successful retail businesses have gross margins of around 30%. But you have to match your operating model to the reality of your margins. If you’re going to operate on low to medium levels of gross margins and associated unit economics, you need to be extremely operationally efficient, aggressively control costs and probably reach significant scale in order to deliver decent returns in dollar terms.

The unique challenges to Unit Economics in the Mental Health market

I spend a lot of time chatting with founders about this issue and analysing the companies that are trying to operate at scale. Carmine does too. Here are the most common challenges we find mental health startups face when it comes to unit economics.

• Reimbursement Rates: Look, we all know getting payers to pay is hard. Mental health has lower reimbursement rates than other specialities and higher rates of claim denial. This makes it hard to grow the revenue per unit.

• Retention and Engagement Challenges: Mental health solutions require long-term user engagement to maximize their impact and also their revenue. This is a major challenge for most MH businesses but is also one of the most controllable areas (more on this later).

• High customer acquisition costs: In case acquiring one cohort of people wasn’t hard enough, in mental health, you usually have to acquire two. First, a payer to pay for your product, then a user to actually use it. Without both, you don’t get paid. You have to build teams capable of landing enterprise-scale deals with payers as well as doing direct client acquisition. This is expensive. Consumer acquisition channels have also become largely saturated and expensive recently and that doesn’t help… I know, I know. This ain’t easy!

• Personnel Costs: Most mental health businesses still need skilled personnel to deliver their service. That means a large part of their unit costs is labor costs. Highly skilled providers require pay that matches that expertise and that dries up unit costs. But cutting on skilled labor is the biggest mistake a mental health startup can make. How would you feel about working with a budget-friendly oncologist?  

Strategies to improve your Unit Economics

OK, so we all agree this is important. We’re all being honest about what our unit economics actually are and we all agree that in mental health, we are up against some significant structural challenges. So if you want to improve your unit economics, what can you do about it?

Here are four strategies you can pursue.

1. Improve retention to increase LTV: With unit economics challenges, you must work backwards and that means starting with retention. The temptation is to start with something further up the funnel like CAC. NO. Stop right there. Start with retention. Please. It’s usually an easier metric to improve and has an uncapped upside. Improving retention could take your LTV for a customer cohort from $200 to $800 (4x improvement). But if you’re CAC is $100, achieving a similar 4x improvement (getting it down to $25) is going to be almost impossible. Retention is the core driver of LTV and profitability for mental health businesses. Ruthlessly focus on your customer experience, understand exactly why users are churning and fix those problems. Research shows a 10% reduction in churn can increase LTV by 50%. Another top tip is to segment your customer base by LTV. You may find that there are cohorts of customers with very low LTVs. If you find them, stop acquiring those kinds of users. Your blended LTV will increase as a result.

2. Dial in your pricing. Pricing is often a forgotten lever in improving unit economics. Dynamically pricing based on demand or quality is one way to increase revenue. Bundling and upselling is another. Finally, explore opportunities to introduce elements of value-based pricing. If you back yourself on your ability to deliver outcomes to payers, bake that into your contracts.

3. Reduce CAC by investing in larger payer deals and creative acquisition strategies: Building partnerships with insurers, employers, and healthcare systems can help lower acquisition costs. For example, enterprise contracts may reduce CAC by 30% compared to direct-to-consumer channels. Talkspace is an example of a company that have used this strategy in recent years to improve their marketing efficiency and their unit economics. They shifted their channel strategy to large payers and as a result, reduced their sales and marketing spend as a percentage of revenue from 71% to 29% in just over two years.

   I also think mental health companies must get much more savvy and creative in how they acquire clients. There is no longer any arbitrage opportunity in channels like Meta and Google. Sure, they provide scale, but they’re expensive. What other channels and strategies might provide cost-effective opportunities to acquire users in 2025? The ideal scenario is obviously to create a product so good that you benefit from organic growth. These are all much easier said than done, but mental health businesses that crack distribution have a huge advantage in this market.

4. Enhance operational efficiency through automation and AI: This is one of the biggest opportunities for businesses right now when it comes to improving unit economics. How can you streamline service delivery and reduce costs by implementing AI and automation? AI-driven triage systems, for instance, can reduce intake time by 40%, in turn, reducing expenses. If you are ruthless about reducing operational costs and open to adopting new technologies to do so, there is a significant opportunity here.

Future trends impacting Unit Economics in Mental Health

1. Emerging Payment Models: The shift from fee-for-service to value-based care is starting to reshape revenue streams. Startups that demonstrate measurable outcomes can secure higher reimbursement rates, improving unit economics. At least, that’s the hope, it’s still very early days for VBC in behavioral health.

2. Role of AI and Automation: AI tools are reducing costs while enhancing engagement. For example, chatbots for initial consultations can lower operational expenses by 20%. As AI agents are built into treatment delivery, costs can be reduced further. On the revenue side, clinically validated AI solutions (e.g., Limbic) will have inherently better unit economics as they don’t rely on labor costs for delivery.

3. Increased Employer and Payer Adoption: Broader adoption of mental health services by enterprises and payers is driving LTV growth for businesses. Payers are increasingly willing to invest in large-scale programs to drive population mental health, like what the state of California has done with Kooth and Brightline or what the NYC Health Department has done with Talkspace for teens. Corporate wellness programs also offer predictable revenue streams and large user bases. Both of these trends will support improved unit economics.

Myself and Carmine agree that there is an enormous opportunity to transform care delivery in mental health. The startups that master their unit economics are going to be the ones best positioned to lead this revolution. They will have sustainable business models ready for scale and that will make them very attractive to investors.

Founders should view unit economics not just as numbers in an excel file but as a strategic tool to align their mission with their business model - ensuring both lives and livelihoods are positively impacted. That’s the route to delivering true impact at scale, the north star we are all pursuing.

That’s all for this week.

If you want to chat about unit economics in more depth, please reach out. Always keen to discuss these topics.

Huge thanks to Carmine and OneMind for their collaboration on this piece. They are a really cool organisation doing great work, so go check them out!

Keep fighting the good fight!

Steve

Founder of The Hemingway Group

P.S. I’m doing a mini-tour of the US in February (LA, NYC and SF). If you wanna hang and chat mental health, shoot me an email. Bonus points if you’ll come watch basketball with me!

P.P.S. If you want to become a THR Pro member, you can learn more here.