I’m really happy you made it here today.
Let’s get your questions answered on unit economics so you can read it, grasp it, and make your ecommerce brand more money.
Unit economics quickly became a hot topic the last 3 years, and many were swimming naked:
“Only when the tide goes out do you learn who has been swimming naked.” - Warren Buffet
Brands grew easily in 2020-2021, but in 2022 growth started to plateau.
In 2025 the question is no longer “how fast can we grow”, it’s…”can we grow profitably at all?”.
The answer to that is understanding your unit economics and it shouldn’t be a question for brands, but it is.
Unit economics are foundational in ecommerce - where margins are thin, acquisition is expensive, and scale without profit likely means death for your brand.
The ‘DTC darling era’ of raising capital like a tech company and (hoping) for profit is 5 years gone and investment dollars evaporated.
What Are Unit Economics?
Unit economics on a macro level is “how much X do I get when Y happens in my business?”
In ecommerce it’s most commonly communicated on a micro, product or order level.
Meaning, how much $ do I make if I move 1 unit of product, or 1 order?
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As I said, a ‘unit’ doesn’t just have to be 1 product. It could be:
- 1 category of products
- 1 ad in your ad account
- 1 employee
- 1 order
- 1 customer
- 1 subscription
For the sake of simplicity, we’ll talk about ecommerce unit economics on a 1 product:1 order level in this post.
But let’s clarify something first.
Why Do Unit Economics Matter?
Unit economics matter because profit, growth, and cash flow matter.
Obviously without those, your brand dies. Simple.
When your business is operating with good unit economics it means it’s easier to be profitable.
It’s much harder to be profitable if you’re operating with poor unit economics.
And when it’s harder to be profitable, it means your growth requires outside cash.
Cash investments to your business isn’t bad, but eventually you want the unit economics to be in your favor so you can be less reliant on outside cash to grow.
The whole point in understanding your unit economics is to see what levers you can pull on a product, order, ad, employee, or {insert relevant unit} to make your business more money.
Money is the lifeblood of any business and to keep your business alive you need as much of it as possible.
There is money in the details and details are unit economics.
A Simple Example of Ecommerce Unit Economics
Let’s put numbers on a simple example to show you how this works.
Jordan Pierce is a women’s fashion brand. They sell t shirts, pants, crop tops, and other related pieces of clothing.
Here’s a breakdown of (1) order, for (1 customer), for (1) product they sold:
$100 T Shirt
- $15 Cost of Goods Sold
- $0.30 Shopify Payments $ Fee
- $2.15 Shopify Payments % Fee
- $2.00 Fulfillment Fee Per Order
- $0.50 Fulfillment Fee Per Item
- $1.00 Shipping Box
- $10.00 Shipping Delta (customer didn’t pay for shipping, but you did)
= $69.05 (Pre-Marketing Contribution Margin)
- $60 (Customer Acquisition Cost, or CAC)
= $9.05 (Post-Marketing Contribution Margin)
- $500 (Operational Expenses)
= -490.95 (unprofitable)
Great, let’s stop there for a second.
- We can see that $100 T Shirt was sold, and the variable costs were $30.95. Now we’re left with $69.05.
- But, we spent $60 to acquire this customer. Now we’re only left with $9.05.
- Lastly, $9.05 - $500 in our operational expenses (or OpEx) left us with -$490.95.
We can see we’re unprofitable because this is just 1 order, and our operational expenses and other variable costs combined outweigh the revenue we’re bringing in.
Let’s switch this up a bit.
Say instead of 1 T-shirt, we’re selling a $1000 luxury item, and everything else stays the same (even the transaction fees). That’s $900 more, and we’d be profitable. $409.05 in profit to be exact.
Why? Because the money left after deducting the variable costs from the order heavily outweighed the operational expenses.
Here’s a 3rd way to look at it:
Say you do 100 sales of the exact same $100 T-shirt.
No returns, no chargebacks, and all happy customers.
That’s ($9.05 in profit for 1 unit) X (100 units sold across 1oo orders) = $905.
- The $500 in operational expenses
Now we’re left with $405 in profit, nice!
This example doesn’t account for discounts, returns, chargebacks, and other variable expenses that could be tied to the order like freight in. We’ll save those for another time.
But the point in doing this exercise is to see all costs associated with moving a (unit) of something in your business to see how much you have leftover.
What’s Included & Excluded from Unit Economics
Unit economics is the cost of a unit of {something}, and typically this is all of your variable costs, or costs that are tied to the business as it grows or slows.
Variable expenses go up and down depending on your order volume, which is also variable.
Operational expenses are (somewhat) variable, but they’re less variable compared to certain units of the business, like products and orders.
Let’s set operational expenses aside with the knowledge that the only part of OpEx that matters here is that you’re making enough contribution margin from your business to cover operational expenses.
If you’re not? You’re unprofitable.
Referring to the example above, Jordan Pierce (the brand) moved 1 unit of a T shirt and the business was unprofitable.
But, once they moved enough orders the margin across ALL orders made up enough $$ to cover the operational expenses of the business.
So while OpEx typically doesn’t rise and fall (as closely) as transactional costs to the business - it still matters because you need enough volume and margin to be profitable.
The 5 Biggest Levers In Unit Economics
The 5 biggest areas of unit economics you need to pay attention to are:
- Customer Acquisition Costs (CAC)
- COGS
- Shipping
- Returns
- Discounts
There’s many different line items that get deducted (or added) to a unit of something to find your costs, but the above 5 are the most critical to the profitability of your business on a per unit basis.
1. CAC
Let’s take the above example again..
$100 T Shirt
- $15 Cost of Goods Sold
- $0.30 Shopify Payments $ Fee
- $2.15 Shopify Payments % Fee
- $2.00 Fulfillment Fee Per Order
- $0.50 Fulfillment Fee Per Item
- $1.00 Shipping Box
- $10.00 Shipping Delta (customer didn’t pay for shipping, but you did)
= $69.05 (Pre-Marketing Contribution Margin)
- $60 (Customer Acquisition Cost, or CAC)
= $9.05 (Post-Marketing Contribution Margin)
- $500 (Operational Expenses)
= -490.95 (unprofitable)
The cost to acquire the customer is $60. If we acquire customers at $50 what happens? Our post marketing contribution margin is $19.05 instead of $9.05.
This puts the business in a position to make more margin per order, and allows them to sell less volume of orders to reach the same amount of contribution.
This is easier said than done.
CAC is a byproduct of:
- product market fit (PMF)
- market demand
- media allocation
- diversity of marketing channels
- price elasticity
- competition
- offer
- product quality
- and so many other things.
Most commonly, the fastest and most elastic area of ecommerce marketing (we see) is better media allocation across your advertising channels, and the understanding of diminishing return on ad spend and how to mitigate it.
2. COGS
Cost of Goods Sold (COGS) is the cost to manufacture your product.
It’s the manufacturer’s cost marked up to the rate they sell it you.
So, if the shirt costs the manufacturer $8 to make, but they say the cost for you is $15 then that’s your COGS. The manufacturer has to make money too.
Product costs are some of the least elastic costs you’ll have in your business, meaning it’s difficult for it to swing up or down. They’re inelastic because raw materials and manufacturing is consistent.
This isn’t assuming raw materials shortages and other components of the process.
Now, there are some levels of elasticity once you reach economies of scale, but this is something you reach once you’re doing serious manufacturing volume with someone.
Economies of scale happens when you’re moving so much volume that you can get a volume discount (e.g. a product is normally $15 for you, but once you reach 100,000 units in a month it goes down to $12).
Some product categories are more elastic than others because of the nature of their industry (raw material elasticity, raw material innovations not making a product difference, and other reasons) but I’ll sum this up by saying it’s not something you can just snap your fingers on and expect COGS to diminish.
Let’s move on to another key area of your unit economics as a brand.
3. Shipping
Shipping is one of the sneaky unit economics killers in ecommerce.
Someone pays for shipping, whether it’s the merchant, or the customer. Regardless, shipping is never free even when it’s marketed that way.
Let’s take the above example and say it costs you $10 to ship the item to the customer.
If you gave the customer free shipping then your cost as a merchant will remain at $10.
Say instead you decide that any orders underneath $200 are not eligible for free shipping, and say you charge $10 for shipping anything underneath that level.
The math:
- $10 shipping cost (as a merchant)
- $10 shipping paid (customer to merchant)
= $0 in shipping
Congrats! You’ve reached a shipping delta of $0 which is heaven for ecommerce brands. The goal of shipping is to:
- not pay an arm and a leg
- not have your customer pay an arm and a leg
- still get them through the door without shipping being a purchase hesitation
Free shipping thresholds are a conversion mover (or breaker), but setting it at the right spot is a contribution margin mover (or breaker) too, so tread carefully.
Another easy way to offset shipping deltas in a way that helps you as a merchant is baking in shipping costs on top of product costs:
Say you’ve sold 500 orders over the last year, and you’ve paid $4500 in shipping costs, and customers paid $400..
The math:
- $4500 (shipping costs)
- $500 (customers to merchant)
= $400 / 500 orders = $8.
You could take the $8 avg per order, and add that in to the product costs.
This way, you can offer “free shipping” to the customer but they’re still paying for it on the back end.
It’s not only a margin booster, but it’s a sales conversion booster too. Customers are more likely to purchase products with free shipping than not, and they don’t know who’s covering the cost.
Customers don’t know your margins. They just know if they feel like they’re getting a good deal or not.
This depends on your category.
If you’re selling $50 products and you’re tacking on an extra $8 to make it $58, that’s a 16% increase.
But if you’re selling $150 products and tagging on $8, it’s a 5.3% increase.
There is a price elasticity of demand component to this, but we’ll save that topic for another time.
Let’s keep moving and cover returns now.
Quick Pause - Sneaky Unit Economics Killers
I mentioned shipping as a sneaky unit economics killer. But what else? I pinged one of my friends Thomas Gleeson over at StoreHero to get his thoughts on other unit economics killers.
For context, StoreHero unifies your sales, marketing data and costs to give you a real time view of your profitability.
I asked him a few starters:
- Which area of business do brands spend the most on unknowingly?-
- What is the quickest win (and most elastic) part of unit economics that that brands can have short term impacts on?
- What's a line item within businesses unit economics that's a sneaky killer? More than they realize?
Here's what Thomas had to say:
Notice a few of those uncommon unit economic killers?
For me, that was most notably something so obvious, but so big - not being able to return transaction fees. If a customer purchases your product, returns it, and you accounted for shipping deltas there are still not a net zero customer because you can't return your transaction fees.
So any customer who purchases from your store and returns you're eating that cost. Unless of course you bake in the average % you pay across your store into the product.
Another eye opener is the Buy Now Pay Later (BNPL) option. 7-8% is 3-4X the normal transaction fee rate you get via Shopify, Stripe, or most payment providers.
However, offering BNPL allows you to convert more customers as it's less of a financial weight. Offering this for higher priced goods makes sense, but if you transact goods under $100 then run an analysis of how many BNPL orders make up your gross sales, and how much you've spent transacting those customers. The data may be enlightening.
Okay, back to the top 5 unit economic levers and next up is shipping.
4. Returns
Similar to shipping, there’s a cost you’re paying as a merchant for returns.
Unlike shipping, returns are a cost for you as the merchant but not your customers.
Returns are typically free for customers.
There’s a certain amount of returns you do on an annual basis, and those returns make up a % of sales.
Returns weren’t included in the above example, but it’s important to calculate when you’re doing a full on unit economics calculation.
Similar to shipping, you can bake in a certain $ amount to the product after markup so that you’re not losing as much on returns as it says on paper.
The customer doesn’t know, but your bottom line will.
When you couple bake additional costs into product pricing it becomes a powerful profit driver for the business.
Lastly, let’s cover the 5th one.
5. Discounts
99.9% of brands discount. They’re inevitable because not only is the consumer conditioned to want and take action more with them, but not every customer will be your most ideal customer.
Here’s what I mean by that:
The more ideal the customer, the more value alignment to what you sell, and the less likely a discount is needed.
But when you have less ideal customers, a discount could get them over the line to purchase.
Said more simply, the lower quality the customer, the higher likelihood a discount is needed for them to see a value exchange.
It’s a very simple concept that coincides with supply and demand too.
Similar to shipping and returns, discounts as a % of your top line revenue can be baked into the product cost so that you’re not eating 100% of the discount rate when you’re transacting business.
Discounts aren’t the enemy. But not baking in your average discount across your orders into your pricing is.
It’s an immediate margin killer.
Let’s briefly touch on cash flow and how it ties to unit economics.
Unit Economics & Cash Flow
You can have great unit economics but terrible cash flow, because cash flow not only comes down to how much volume you’re moving and if you’re covering OpEx, but your cash obligations as a business on a monthly basis.
You could have $5,000 leftover at the end of this month so on paper, you’re profitable, but you have $100K in inventory you need to buy.
Where does that money come from?
- Credit line
- Debt
- investors,
- other forms of money raised, etc.
So keep in mind that the goal is to maximize your profit by tugging on different components of unit economics, but it doesn’t mean that your business will still be sustainable.
This is why running a lean, efficient business with the right people and operations is also key.
The less OpEx you have, the less contribution margin your business needs to be profitable.
And pulling on different components of unit economics isn’t immediate.
It’s something that takes time and effort so that you can sustainably be in business.
Let’s expand that list of 5 into unit economic categories across your ecommerce business now.
Optimizing Unit Economics Across Your Business
Not only can you optimize unit economics on a per order, per unit, or per customer basis, but you can do it across your entire business.
Here's a few areas you can focus on to start taking action:
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Product & Fulfillment Unit Economic Levers
- Reduce COGS
- Raw material innovation
- Different manufacturer could do the same for less
- Economies of scale once you reach size
- Reduce Packaging Costs
- Don’t spend $10 on boxes to ship
- Use smaller packaging
- If you sell subscription goods send refills in less packaging
- Reduce Freight In
- As much as you can do here.
- Reduce Warehouse Handling Fees
- Similar to COGS, some warehouses may charge for this and some may not. Also depends on what you sell.
- Pick and pack fees are small on the surface, but they’re still a line item. See what can be done to lower them.
Shipping & Return Unit Economic Levers
- Reduce Shipping Delta
- Bake in your average shipping cost into the product pricing.
- Bake it in on a sliding scale. Higher price items = more weight. Lower price items = less weight. This will go less noticed by the consumer.
- Reduce Return Delta
- Bake in your average return cost into your product pricing.
- This is harder to do if you’re in a high return industry like apparel, but something can be baked in to help your unit economics. Also make a damn good return policy, make expectations clear on your PDPs / LPs and if you sell apparel please put sizing software on the page to increase conversion, reduce returns, and help your bottom line.
- Get damn good return software like Loop.
- Reduce Refund Rates
- Similar to above, but slightly different. Refunds happen when a poor experience happens or the consumer doesn’t see an option to exchange, or see the value in store credit. Keep them as a customer instead of a net zero customer. A net zero customer is someone who purchased, returned & refunded and never came back. Put more effort into keeping them and creating a good experience. You won’t win them all but this will make a big impact if you’re doing decent revenue.
Marketing Unit Economic Levers
- Reduce CAC
- Better media allocation
- Better creative
- Better understanding of supply & demand in the market
- Better understanding of diminishing return of ad spend
Tech & Ops Unit Economic Levers
1. Reduce Merchant Fees.
- If you’re on Shopify these are set. But if you’re doing >$2M a year in revenue then Shopify Plus immediately pays for itself.
2. Reduce SaaS Stack Costs.
- This is a huge one. Small brands (less than $50M a year) get a TON of SaaS costs they don’t need.
3. Reduce OpEx.
- People is the biggest one. If you look around and feel like your team is bloated and there isn’t enough work going around, it’s time to stand up better SOPs to run lean into the future.
Let’s wrap it up.
What Now?
Unit economics is a simple but powerful aspect of your business that can make it, or break it.
Once you start looking into the different levels you can pull on a per product, order, business segment, customer segment, and other areas of the business it gives you an insane amount of visibility to where your business needs to optimize to get more CASH.
Let’s recap with an action plan for you:
- Lay out your unit economics on 1 of your products
- See where you’re overextended. Is it marketing? Shipping? Returns? Is your OpEx bloated so your Contribution Margin can’t cover it?
- Take the necessary actions on the different levers of unit economics in your business
- Double check your OpEx. This less about unit economics and more about “how hard are you making it for your business to be profitable because of your inability to innovate processes?”
- Profit from your adjustments.
Need Help With Unit Economics?
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We operate growth plans with unit economics in mind because the numbers in the platform are secondary to the numbers in your P&L and cash flow statement.
Get in touch by clicking the Get In Touch button above and we’ll help you out!