Unit economics: does each new customer still make money?

Key takeaways

Unit economics for a small business is the profit made on one order, job or customer after the costs that sale directly causes. Most owners count materials and delivery and forget the minutes of support and admin each sale creates. If the unit does not make money, growing only multiplies the loss.

• Unit economics: revenue minus direct costs for one order or customer.
• Include the minutes of support and admin each sale triggers.
• Scale only when contribution per unit is positive and stable.
• Cutting cost to serve improves every future sale.

What are unit economics?

Unit economics are the revenues and costs associated with a single unit of what a business sells, such as one order, one job or one customer. The key figure is contribution: what remains from the sale after its direct, variable costs, which then goes towards fixed overheads and profit.

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• Work out your cost per task before you outsource

How do you calculate contribution per order?

Take an illustrative order of £80. Goods cost £40, delivery £6 and payment fees £2. The order also causes about 6 minutes of customer contact and 5 minutes of admin. At £19.81 per worked hour for a £30,000 employee, those 11 minutes cost about £3.63. Contribution is £28.37.

• Revenue: £80.00.
• Goods: £40.00. Delivery: £6.00. Payment fees: £2.00.
• Support and admin time: about £3.63.
• Contribution: about £28.37.

• Scaling back-office operations as order volume grows

Why does cost to serve get missed?

Cost to serve gets missed because it sits inside salaries, not on an invoice. Nobody sees a line that says customer questions per order. Yet as volume grows, those minutes become the hours that trigger the next hire. Measuring them per unit shows the cost of growth before it arrives.

• The hidden costs of doing everything in-house

How do you improve unit economics?

Improve unit economics by raising price, lowering direct costs or cutting the time each sale consumes. The third is usually the most controllable. Fewer avoidable contacts, less re-keying and a lower hourly cost for routine handling all raise contribution on every future order.

• Remove causes of repeat contact.
• Automate confirmations and updates.
• Cut duplicate data entry.
• Use managed capacity for routine handling.

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What difference does the hourly cost make?

In the example, 11 minutes at an indicative £12 per hour from a managed offshore team costs £2.20 instead of £3.63, a saving of about £1.43 an order. At 2,000 orders a month that is roughly £2,860 a month. The figures are illustrative, but the method works for any volume.

• BPO cost per hour in the UK

When are unit economics misleading?

Unit economics mislead when averages hide differences. A few customers or product lines may consume most of the support time. Split the calculation by product, channel or customer type before acting. They also ignore fixed costs, so a positive unit does not guarantee an overall profit at low volume.

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What does this look like in practice?

A pattern we see in UK online and trade suppliers: one product range generates three times the customer queries of the others, because sizing or fitting information is unclear. On paper it has the best margin. Once support minutes are counted it has the worst. Fixing the product page does more than adding staff.

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Unit economics checklist

Work through this for your main product or service.

• Define the unit: order, job or customer.
• List direct costs that occur with each one.
• Count contacts and admin steps per unit.
• Time them and price at the loaded hourly cost.
• Calculate contribution per unit.
• Split by product, channel or customer type.
• Recalculate quarterly as volume grows.

• The KPIs that show whether your business is really scaling
• Why profit margin falls as a business grows, and the fix

Next step

Send us your average order value, direct costs and monthly volumes of orders and contacts. We will work out contribution per order with the support and admin time included.