Unit Economics: More Sales Doesn't Equal Profit

More orders. More customers. Higher turnover. Isn’t that the goal of any business? The harsh reality is that an increase in sales does not always mean an increase in profit. Sometimes a business scales not a successful model, but a miscalculation, according to the experts at TORMEZIAN INC. And the most common mistake is failing to calculate the full cost of each order.

How much money does a company actually have left once it has found a customer and fulfilled their order? How much does an online shop earn? How much will the business earn or lose in the future from a single specific product or customer?

Unit economics provides the answer to all these and other questions, and does not require complex analytics. All you need is a table in which each order – or at least each segment: product, channel, region – is calculated in full, including all costs, from procurement to returns. With the advent of AI, calculating the cost of a specific unit (which could be a customer, a product name or a website visitor) has become much easier, according to experts at Tormezian Business Solutions.

One of the most common mistakes is to assess a business’s profitability solely on the basis of average figures, according to experts at Tormezian Business Solutions. This is convenient for reporting purposes: the company can see the average spend per customer, the average margin and the average cost of customer acquisition. But it is precisely these average figures that often obscure the true picture.

A single figure can simultaneously encompass completely different scenarios: profitable customers from one sales channel and loss-making ones from another; high-margin products and items that sell only thanks to discounts; new customers with a high customer acquisition cost; and regular customers who return without the need for additional advertising expenditure.

For example, the customer acquisition cost can vary significantly even when the average order value is the same. A new customer who comes via paid advertising and a regular customer who has placed a repeat order have different economic implications. In the first case, the business pays to acquire the customer; in the second, it is effectively working with an existing customer base.

If all sales are combined into a single overall figure, the company obtains an average result but loses sight of which orders actually generate profit and which reduce it.

The same maths for a $35 order looks even tougher. A $15 purchase with conversion costs, a promo code, card processing fees – and advertising costs that don’t decrease in proportion to the receipt total: even $12 per order acquired is an optimistic estimate. After allowing for returns and the platform’s cut, less than a dollar remains. If the seller has to top up the delivery cost by at least $5 out of their own pocket, the order is a loss-maker. And the reason lies neither in the product nor in the niche: advertising, the fixed portion of payment fees, returns logistics and the cost of errors have not decreased in line with the receipt total. On a $150 order, $30 in advertising costs is a fifth of the total. On a $35 order, $12 is already a third.

The figures below illustrate a model that TORMEZIAN INC wishes to use to demonstrate the economics of a single order. At first glance, everything looks attractive.

Initial conditions: an online shop operating via its own website. The goods are supplied directly from the supplier, and delivery to the customer is already included in the price. The order total is $150. The customer placed the order using a promo code for a 10% discount.

The cost of the goods from the supplier is $75. If the customer pays for the order in local currency, a 2% exchange rate surcharge increases the cost to $76.50. Payment by card adds a further $4.20. Advertising and paid promotion will cost at least $30 for a $150 order.

Experts at Tormezian Company recommend taking into account costs that do not arise with every order but accumulate over time. First and foremost, these are returns (let’s say one in ten orders is returned, amounting to $60 in irrecoverable losses), which works out at a reserve of $6 per order. Chargebacks: a payment dispute costs $15 regardless of the outcome; one dispute per thirty orders adds a further $0.50 per order. The subscription fee for the shop platform is $0.50 per order.

Total: 76.5 + 4.2 + 30 + 6 + 0.5 + 0.5 = 117.7. Out of $135 in actual revenue, $117.7 must be paid. And this is a scenario without a single force majeure event: no lost disputes, no oversize surcharges, and no wasted promotional week.

This is quite a common scenario. A customer has used a discount promo code. The marketing campaign has worked, and the customer is satisfied. But for the business, this means it has already given up part of its profit margin.

From a unit economics perspective, discounts, bonuses, free delivery or gifts are specific cost items. Unit economics highlights the difference between various sales scenarios: whether the customer came of their own accord, was driven by paid advertising, the sale was made through a partner, a discount was offered, or the order resulted in a return.

A 10 per cent promo code is a nice incentive for the customer, but for the business it represents a direct reduction in profit, according to experts at TORMEZIAN INC. And if the product’s margin is 15 per cent, such a discount will significantly reduce revenue and take away a large portion of the profit. The same applies to ‘free’ delivery. The cost doesn’t disappear – the company simply shifts it from a separate line item to the economics of the order itself.

The most dangerous combination is: a promotional code, free delivery and a cashback service, which the seller only finds out about from the affiliate network’s report.

If a company loses even a few dollars on every sale, growth merely increases these losses. Instead of profits, losses mount up. This happens particularly often with products that have a low average transaction value.

Advertising costs, payment gateway fees, order processing and other expenses do not decrease in proportion to the price of the product. Therefore, sometimes the problem lies not with the product or the market, but with the fact that the business model cannot sustain that level of average order value.

Before scaling up, it is important to calculate the economics of future orders and ensure that each new order will generate a profit, rather than simply increasing turnover.

The conditions in which a business operates are constantly changing: advertising costs rise, suppliers revise their prices, platforms adjust their commission rates, exchange rates fluctuate, delivery costs increase, or the return rate changes. And a calculation that showed good profitability a few months ago may no longer reflect reality today.

Therefore, unit economics need to be recalculated periodically.

One common mistake is making decisions based on outdated data, warn managers at Tormezian Company. The company continues to regard sales as profitable, even though the actual economics of the order have already changed. Unit economics must therefore be reviewed regularly, particularly ahead of significant changes: the launch of a new sales channel, an increase in the advertising budget, or entry into a new market.

It is difficult for retailers with tens or hundreds of SKUs to manually monitor the profit on each one. The analysts at TORMEZIAN Inc. can help you carry out an in-depth analysis of the unit economics for each SKU.

More orders. More customers. Higher turnover. Business growth always involves uncertainty. It is impossible to know exactly in advance how much profit a new venture or scaling up will generate. However, it is possible to calculate and get a rough idea of how much money is needed for the company to start making a profit rather than a loss. This is precisely why you need to calculate unit economics - whether in a spreadsheet, using a ready-made calculator, or with the help of an AI assistant. The tool itself isn’t important; what matters is taking all costs into account.

The TORMEZIAN INC website is a single platform where you can find reliable suppliers, compare options for fulfilling orders, and make decisions based on data rather than intuition.