Understanding Unit Economics for an E-commerce Brand

Understanding Unit Economics for an E-commerce Brand

Before you can market or sell anything, it's essential that you understand the costs that go into selling that product.

  • Website development
  • Paid social media
  • Organic content creation
  • Search engine marketing
  • Email & sms marketing

The goal of all of these activities is to reach your target audience & deliver messages or content to eventually turn them into customers. 

That said, the foundation of all of each and every one of these activities is financial

Every marketer knows what it's like to have ideas about content creation, ad budgets, or promotional spend, only to discuss with their operational partners and hear the question "What's that going to cost?" 

And while a marketer might dread the question, it's 100% the right question. In fact, as a marketer matures in their career & experience, it's the question they also ask first, before engaging any marketing initiative. 

Understanding Unit Economics

If you've watched Shark Tank for more than 3 minutes, you know that 2 questions that get asked in every single pitch are: 

  1. What do you sell it for? 
  2. What does it cost you to make? 

Sometimes the answers to these questions are straightforward, and sometimes they're not. That's why it's important that you and your team have taken the time to truly understand the costs that make up your unit costs. In my opinion, this is even more important than being 100% dialed in on your opex. While we always want to slash that as operators and keep overhead as low as possible, opex is fixed and can be scaled out of. But a lack of understanding of your unit economics will cause you to set the wrong marketing budgets, revenue & profit targets, and ad spend allocations.

Important Questions to Get the Answers To 

So what questions do you need to answer to understand your unit economics? Here are the main three:

  1. What do you sell your product for? (If you sell many items, use your average order value or basket size for this #)
  2. What does it cost you to make? (If you get it landed to you, then this is straightforward. If you are manufacturing yourself, then there are more steps to this calculation)
  3. What's the cost of delivery? (What does it cost you to get it to your end customer?) 

Below, I've recorded our internal training for Growth Strategists on Unit Economics. I answer the three questions above, and walk through a sample product to understand all that goes into the costs of that product, as well as what amount of $ you have to spend on ads to profitably drive sales. 

It's Worth It

After years of running our own brands and advising others, please trust me. This process is worth it. 

"Ball parking" or "estimating" your costs will hurt your business in the long run. 

If you have a financial team or CFO, hopefully they have done this work for you so you don't have to. 

If you're currently on the e-commerce journey on your own, then I'd encourage you to take the time to understand your product the way I broke down the t-shirt in the video so that you can properly understand your business, your costs, and ultimately your financial future.

Most of the services we provide are viewed as "marketing". Which is fair - because they aremarketing.

Understanding Unit Economics for an E-commerce Brand

Jeremy is an integrator who’s able to intersect marketing, media, and tech to deliver results for companies across a variety of industries.