Dollar by Dollar: Mastering Unit Economics for Sustainable Growth

Understanding your numbers isn't just good business practice—it's essential for ecommerce retailers. Yet we've found that one of the most confusing concepts for online retailers is also one of the most important: unit economics.

What Are Unit Economics (And Why Should You Care)?

Simply put, unit economics is the financial analysis of a single unit of sale. For e-commerce businesses, this means breaking down the profit and costs associated with each individual order.

The magic formula that drives e-commerce success looks like this:

Contribution Margin = Revenue - Cost of Goods Sold - Marketing Costs - Fulfillment Costs

Why does this matter? Because positive unit economics means each sale contributes to your overhead costs and eventual profitability. Negative unit economics means you're losing money with every transaction—a path that leads nowhere good, no matter how impressive your revenue growth looks.

Breaking Down the Components

Revenue: More Than Just Price × Quantity

Your revenue starts with your Average Order Value (AOV):

AOV = Total Revenue ÷ Number of Orders

Increasing your AOV is one of the most powerful levers for improving unit economics.

Cost of Goods Sold (COGS): The Foundation of Your Margins

Customer Acquisition Cost (CAC): The Price of Growth

While marketing is necessary for growth, uncontrolled CAC can quickly destroy your unit economics. The key is knowing your numbers and focusing on channels with the best return on investment.

Fulfillment Costs: The Hidden Margin Killer

This is where many e-commerce businesses struggle—and where we can help most. Fulfillment costs include everything required to get products from your warehouse to your customer's door:

3PL Fulfillment Fees

• Order processing fees charged once per order
• Pick fees for each item selected from inventory
• Packaging costs for materials needed to ship safely
• Special handling for custom packaging or kitting requirements

Shipping Fees

• Base rate determined by weight, dimensions, and distance
• Fuel surcharges that fluctuate with energy prices
• Area surcharges for remote or residential deliveries
• Ancillary fees like address corrections or signature requirements

Optimizing Your Fulfillment Economics

Here's where strategic decisions can dramatically improve your bottom line:

Encourage Larger Orders

Each order incurs a single processing fee regardless of size. When customers purchase multiple items, these fixed costs are spread across more revenue, improving your margins.

Optimize Your Product Packaging

Consider:

• Can products be consolidated into fewer picks?
• Are your product dimensions optimized for shipping?
• Is your packaging causing dimensional weight charges?

Strategic Inventory Placement

One of the most overlooked aspects of fulfillment economics is where your inventory sits relative to your customers:

• Position inventory closer to population centers
• Use multi-location fulfillment to reduce shipping distances
• Choose the appropriate shipping speed for your price point

Select the Right Shipping Partners

Not all carriers are created equal:

• Some excel at lightweight packages, others at heavier shipments
• Regional carriers often outperform nationals in their service areas
• Consider hybrid services that use multiple carriers for optimal routing

Putting It All Together: Contribution Margin

After accounting for all these variable costs, what remains is your contribution margin—the amount each order contributes toward covering your fixed costs and generating profit.

A healthy contribution margin means you can calculate exactly how many orders you need to become profitable:

Break-Even Point = Fixed Costs ÷ Contribution Margin Per Order

Real-World Example

Let's look at how unit economics might break down for a typical e-commerce order:

• Average Order Value: $85

• Cost of Goods: $34

• Customer Acquisition: $12

• Order Processing: $2.50

• Pick Fee (2 items): $1.00

• Packaging: $1.75

• Shipping: $8.75

Contribution Margin = $85 - $34 - $12 - ($2.50 + $1.00 + $1.75 + $8.75) = $25

That's $25 from this order that goes toward covering fixed costs like software subscriptions, customer service team salaries, and eventually, profit.

Taking Action

Conclusion

E-commerce success isn't just about driving traffic or creating great products—it's about making the numbers work at the individual order level. By understanding and optimizing your unit economics, particularly in the often-complex area of fulfillment, you'll build a foundation for sustainable growth and profitability.

Need help analyzing or improving your fulfillment economics? Our team of logistics experts is ready to help you turn shipping from a cost center into a competitive advantage. Contact us today for a consultation.