Imagine you’ve just launched your dream eCommerce business. Sales are coming in, but when you crunch the numbers, something’s not adding up. The secret to unlocking sustainable profitability? Even before you’ve launched your product, it all comes down to your unit economics.
At its core, unit economics examines the profitability of selling a single unit of your product, considering all associated costs. Think of it as a detailed profit and loss (P&L) statement, but zoomed in on one individual product. Grasping this concept can help you plan your costs, refine your pricing, and ensure every sale moves you closer to your business goals, not further away.
Why Unit Economics are Important
Understanding unit economics is crucial for any ecommerce business looking to scale effectively and sustainably. The granular focus of unit economics allows you to evaluate your pricing strategy, customer acquisition costs, and operational expenses in advance, ensuring your finances align best with your long-term profitability and business growth goals before launching your product/offer.
One of the biggest advantages of mastering unit economics is that it highlights whether a product will be profitable, before you even launch it. If your numbers don’t look right, you can adjust early by tweaking your sales price, negotiating better cost of goods (COGs), reducing freight costs, rethinking customer delivery charges, or even reengineering the product to hit a lower price point by using less expensive materials.
I recommend aiming for a “four-quarter accounting” framework, allocating your spend to each of these:
- 25% for COGs
- 25% for customer acquisition costs (CPA)
- 25% for operational expenses (OPEX)
- 25% for net profit
This balanced approach ensures you’re not overspending in any area. It also enables you to confidently test offers, so you can discover which ones resonate best with your customers, while knowing they’ll remain profitable.
Another key consideration when planning your unit economics is your strategic approach to customer acquisition. Although it’s tempting to achieve higher profit margins on first order, this isn’t always the best approach for long-term profitability and scaling. For products with a high customer lifetime value (LTV), instead of targeting a 15% profit margin on the first order, you could aim for smaller margins to fuel aggressive acquisition efforts. This strategy positions you for rapid scaling while maintaining long-term profitability.
Setting Up Your Unit Economics Spreadsheet
Ready to dive in? To make things easy, here’s a blank unit economics spreadsheet template for you to use.
Once you’ve downloaded the spreadsheet, the first step to setting it up is inputting your variable data at the top of the sheet. Here’s what you’ll need to do:
- Freight rates: speak to your freight forwarder to get the current shipping rates for air and/or sea.
- Currency: Decide whether you want your unit economics sheet to be in pounds sterling (£) or US dollars ($), depending on what works best for your business.
- Industry benchmarks: At the top of column F, select the eCommerce industry for your business and products. If your predicted margins meet the right benchmarks for your industry, these cells will turn green – a quick and easy way to check you’re on track.
Finally, list your products and offers in column A and you’re ready to start inputting your numbers.
Cost of Goods
Your cost of goods (COGs) is the base amount you pay suppliers for raw materials and manufacturing. To calculate this, ask your supplier for the cost of each individual product and input this into column B. Make sure this price is EXW as you’ll be handling all of your own shipping costs, picking up the items from the suppliers warehouse.
Column C will automatically calculate your COGs margin as a percentage of the sales price once you’ve input the sale price (column N). This gives you an instant view of how much of your revenue is taken up by production costs.
Freight Costs
As well as asking your supplier for your COGs, you also need to ask them for additional information to inform your freight costs:
- Master carton size: This includes the dimensions, cubic size, and weight of the master carton. Input the cubic size into column E.
- Units per carton: The number of units that fit in the master carton should be input into column D.
- Individual box dimensions: Input this information into column F so you can refer back to it if needed.
Once you have your carton data, you can calculate your freight costs. All you need to do is select whether you’re going to be using sea or air freight in column G, and your shipping will automatically be calculated per unit in column H. This is calculated using the freight fees you input into the variable data section at the top of your spreadsheet and divides the size of the carton by the number of units in the carton.
Import Duty
To find out what your import duty will be for each product, you’ll need to look up your product HS code. This will give you your import duty for that product as a percentage, which you can then convert into a $ or £ figure and input into column I.
VAT
As part of your unit economics, you’ll need to include Value Added Tax (VAT) on both your COGs and your freight costs. Column J in the spreadsheet will automatically calculate your unit VAT based on the UK VAT rate of 20%. This can be changed by editing the formula if you’re based in another country with a different VAT rate.
Landed Cost of Goods
Landed COGs (column K) combine the COGs and freight costs together to provide a fuller view of the cost of receiving your products. You will notice this figure doesn’t include VAT. When VAT is included with the COGs and freight costs, you get the gross landed COGs (column L). Column M then provides the percentage of landed COGs (excluding VAT) against the sales price (excluding VAT) to create the landed COGs margin.
All three of these metrics are calculated automatically in the spreadsheet once you’ve provided your COGs, freight, VAT and sales price information.
Sales Price
In column N you’ll input the price you want to sell your product at including VAT. Column O will then automatically show your sales price excluding VAT. It’s important to include your sales price both with and without VAT because if you’re a VAT registered business, the 20% VAT on your product will be taken away from your sales price.
Customer Shipping
As part of your calculations, you’ll need to decide whether you’re going to charge customers for shipping or not. You’ll make this selection in column P and input the amount customers will pay for shipping in column Q (if you opt for this).
You’ll also need to input the amount it will cost you to ship the product to the customer and place this in column R. This number won’t change whether you decide on customers paying a shipping fee or not as this is just outlining your shipping costs.
Payment Processing
Your payment processing fee will vary based on your eCommerce platform/payment gateway. For example, the payment processing fees for Shopify vary from around 1.5% to 2% plus 25p depending on your Shopify tier.
In the payment processing column (S), instead of inputting your fee, you’ll find the formula =(N9/100)*1.7+0.25. In this example, the percentage fee is 1.7% plus 25p. However, for your products and offers, you need to change the 1.7 and 0.25 in this formula to the exact percentage fee you will need to pay.
Cost of Goods Delivered
If you’ve managed to fill in all the previous columns, your COGD will automatically appear in column T, showing the landed COGs, shipping costs, and payment processing fee combined. This figure also takes into consideration your customer shipping cost and whether the customer will pay this. If the customer will pay this, this amount will automatically be taken away from the COGD amount.
As well as seeing your COGD in the currency you’re using, you’ll also see it in column U in the form of a margin. This is calculated as the COGD against the sales price (excluding VAT).
Gross Profit
As an inverse of your COGD profit and COGD margin, you get your gross profit (column V) and gross margin (column W). This is one of the key metrics that will vary based on industry. For example, within the apparel industry, you should be aiming for a minimum gross margin of 65%, but ideally closer to or over 70%.
Operation Expenses
Operational expenses (OPEX) cover everything from staff and software to storage and packing and will be a percentage relative to your sales price. Your OPEX will greatly depend on the set up of your business operations.
If you’re a business with assets like staff, software, and/or premises, these will all form part of your OPEX percentage. This type of business should be aiming for an OPEX of around 15%, although the size of your company will affect this. As you grow, you should be able to reduce your OPEX costs but if you’re a company doing less than 1 million in revenue, you will have a higher OPEX percentage. However, you still wouldn’t want this to go over 20%, so keep an eye on this.
If you’re not running your operations in-house and instead use a 3PL (like many smaller eCommerce businesses), you’ll want to split this section into a picking fee, storage rates, and a packing fee.
Cost Per Acquisition
Within column Y, you’ll place what you think you can achieve from a cost per acquisition (CPA) point of view. As a brand new brand, this can be difficult to predict so you might want to test the waters out first by running a product for a week to gather some data. You could also carry out some industry research to give you a general idea of what your CPA should be.
As a general rule of thumb, for average order values (AOVs) over £50, your CPA should be around 25%. Whereas, for AOVs under £50, your CPA percentage will be much higher. A useful way of finding this out for your business is to use the free tool from Varos.
Once you’ve input what CPA you predict you can achieve, column Z will show you your marketing margin, which is the percentage of your CPA against your sales price (excluding VAT).
Contribution Margin
Providing a deeper understanding of your profitability, contribution margin is an important metric to plan and track. Contribution margin is what you’re left with from your sales price after you’ve removed your variable costs. The spreadsheet will automatically calculate this for you in column AA by subtracting your COGD and CPA from your sales price (including VAT). This will then be translated into percentage form in column AB.
Find out more about contribution margin and why it’s important for your business here.
Net Profit
Your net profit is what remains after all costs have been deducted from the sales price. This figure will be in column AC and provides a straightforward view of which products/offers are losing you money and which are your most profitable.
The following column (AD) is your net profit in percentage form against your sales price (excluding VAT). Although the ideal number here will vary depending on industry and strategy, your net margin should normally be around 10-15%.
Break Even ROAS
Finally, your break-even return on ad spend (ROAS) is simply the ROAS number you have to hit in order to break even. This tells you the minimum return needed to cover costs and will vary from business to business and product to product. Usually, break-even ROAS tends to be between 1.3 to 2.5 which is achievable for most businesses. However, the higher your break-even ROAS, the harder it becomes to reach break-even at scale and go above it to make a profit.
Mastering unit economics isn’t just about balancing costs; it’s about building a roadmap for scalable and sustainable growth. By focusing on the numbers behind each unit, you’re able to make informed decisions so you can confidently achieve your business goals.
Struggling to understand your unit economics or have a question? Take control of your unit economics today. Simply drop me a message to talk about how I can help your business.