Unit Economics
Definition
Unit economics refers to the direct revenues and costs associated with a single unit of product or service sold.
It helps determine whether each sale is profitable after accounting for variable costs like shipping, packaging, and marketing per item.
Strong unit economics are essential for long-term sustainability and profitability.
Good or Bad?
Good?
- Clarifies if you’re making or losing money per sale
- Helps identify pricing and cost-cutting opportunities
- Supports smart scaling decisions
Bad?
- Often overlooked by new store owners
- Requires accurate tracking of all variable costs
- Can be distorted if fixed costs are wrongly included
Why does it matter?
Knowing your unit economics gives you a clear picture of your business’s financial health.
Even if total revenue looks good, poor unit economics can lead to losses.
It’s especially critical for paid acquisition, where you must ensure customer value exceeds acquisition cost.
Common Mistakes
- Ignoring hidden costs like packaging or payment fees
- Including fixed costs when only variable costs should be measured
- Relying solely on revenue without considering margin
How to Improve It?
- Break down your costs per unit in detail
- Monitor average order value and cost per acquisition
- Use analytics tools or dashboards to track trends
Real-World Example
An online coffee shop sells a bag of beans for $15.
Variable costs:
- Product: $6
- Packaging: $1
- Shipping: $4
- Marketing per unit: $2
That leaves $2 profit per bag. If the store runs a discount or offers free shipping without adjusting margins, it may lose money on each order.
Related Terms
- Contribution Margin
- Customer Acquisition Cost
- Lifetime Value
- Break-Even Point
FAQs
Should I include fixed costs in unit economics?
No. Unit economics focuses on variable costs per unit only. Fixed costs like rent are handled separately.
How does unit economics affect pricing strategy?
It helps ensure that your prices cover all direct costs and still leave a profit margin.
Can a store have high revenue but bad unit economics?
Yes. High sales volume doesn’t guarantee profitability if you lose money on each sale.
