Unit Economics 101

Unravelling the details of unit economics for eCommerce players

This is one of the most important concepts to grasp for anyone planning to launch or work in a startup in the eCommerce space.  While different companies look at unit economics very differently, at an uber level,  following are the key components of Unit Economics for an eCommerce startup:

1: Net Margin/Income ( GMV - Discount - Cost of Goods Sold)

2: Contribution Margin 1 (Net Margin - Direct costs related to the transaction)

3: Contribution Margin 2 (Contribution Margin 1 - Shared costs related to the transaction)

4: Contribution Margin 3 (Contribution Margin 2 - Marketing Cost)

Let us see the next level details of unit economics for 2-3 different types of startups.

Why is unit economics important?: if unit economics is negative, every incremental order processed by the startup increases the overall burn. Whereas when unit economics is positive, every incremental order processed by the startup helps bring down the overall burn for the startup pushing it further towards profitability. 

What are the top levers of improving unit economics?: By far the biggest lever for improving unit economics is at the net margin lever. This is the primary reason why most of the eCommerce firms focus on building their private label business as it helps improve unit economics significantly. Other than private label, operations improvement, marketing optimisation and reduction of support requirements are the top levers for improving unit economics.