E-commerce Unit Economics Explained (Stop Guessing If You're Profitable)

I can't tell you how many Shopify store owners I've spoken to who can tell me their revenue to the penny but have no idea whether they're actually profitable. Revenue is the easy number. Profit is the one that matters, and it lives in your unit economics.

What are unit economics?

In plain English: how much money do you make (or lose) on each unit you sell? Not on a good month when everything goes right, but on average, including all the costs that are easy to forget about.

The real cost of selling a product

Let's walk through a real example. Say you sell a candle for £28.

Most founders will tell me their cost price is £6, so they're making £22 margin. Brilliant, right? Not so fast.

Here's what the actual breakdown usually looks like:

Cost	Amount
Product cost (COGS)	£6.00
Packaging & inserts	£1.80
Fulfilment (pick, pack, labour)	£2.50
Shipping to customer	£3.95
Payment processing (Stripe/Shopify Payments)	£0.95
Shopify subscription (allocated per order)	£0.30
Returns & replacements (allocated avg)	£1.10
Total cost per unit	£16.60
True margin per unit	£11.40

That £22 "margin" just became £11.40. And we haven't even touched marketing costs yet.

Contribution margin: the number you actually need

Contribution margin is your revenue minus ALL variable costs, meaning everything that scales with each order. It's the money left over that contributes to covering your fixed costs (rent, salaries, software) and, hopefully, profit.

The formula:
Contribution margin = Selling price − COGS − Packaging − Fulfilment − Shipping − Payment fees − Returns allocation

Once you know this number per product, per channel, and per customer segment, you can make real decisions:

• Which products are worth promoting? That premium candle with a 40% contribution margin? Push it. That discounted bundle you created for Black Friday with a 12% margin? Maybe don't make it permanent.
• Which channels are profitable? If your contribution margin on a product is £11.40 and it costs you £15 in ad spend to acquire that customer through Meta, you're losing money on the first purchase. That's only okay if you know your repeat purchase rate makes up for it.
• When is a discount too much? If your margin is £11.40 and you offer 20% off (£5.60 discount), your new margin is £5.80. Is that worth it for the volume increase? Sometimes yes, sometimes absolutely not. The point is you should know before you run the promotion.

Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

These two numbers together tell you whether your business model works.

CAC = Total marketing spend ÷ Number of new customers acquired

LTV = Average order value × Average number of orders per customer × Contribution margin percentage

The general rule: your LTV should be at least 3x your CAC. If it isn't, you're either spending too much on acquisition or not doing enough to drive repeat purchases.

Most startups I work with have never calculated their LTV properly. They know their AOV, but they've never looked at purchase frequency or retention curves. When we do the analysis together, it usually reveals that a small percentage of customers generate a disproportionate amount of profit, and those are the customers worth investing in.

How to actually track this

You don't need fancy BI tools to start. A well-structured spreadsheet works for most startups. Track:

1. COGS per SKU (update quarterly as supplier costs change)
2. Fully loaded cost per order (including all variable costs)
3. Contribution margin per product and per channel
4. CAC by channel (Meta, Google, organic, email, etc.)
5. Cohort-based LTV (how much do customers acquired in January spend over 3, 6, 12 months?)

Review monthly. Adjust quarterly. And never, ever run a promotion without knowing what it does to your margin.