If you have strong reason to believe that your business is revenue rich but profit poor, understanding unit economics may help you ensure that your business is profitable and viable for the years to come. If you’ve been searching for a guide to economics that is simple and straightforward to understand and features easily implementable tips, simply continue reading to start learning about unit economics and how it can help you with your business’ long term profitability.
Understanding unit economics: What are unit economics?
Infographic created by Clover Network, a merchant services company
First understand the difference between variable costs and fixed costs:
As you’re probably well aware in order for your business to make sales, there are unavoidable costs that you have to budget for. These broad costs can be placed into two types of costs, variable costs and fixed costs. Fixed costs are costs that don’t increase even if your sales increase. If you’re unsure of exactly what a fixed cost is, examples of fixed costs include your rent or mortgage and your utility bills. While your variable costs will increase as your orders increase.
Work out your cost of delivery:
One metric which you should figure out is your cost of delivery. Simply put your cost of delivery accounts for getting your end product to your customer and back to your business if necessary. The costs which you’ll need to add up to work out your cost of delivery include the cost of goods sold, which is the production costs of the item sold, your shipping and receiving costs, your business’ transaction fees, your pick up and pack up fees, your shipping and fulfillment fees and your return fees. The latter of which is important to include as there will be times where customers will make the decision to send back items that they have paid for and received for an exchange or refund.
Work out your gross profits and decide on a net profit target:
Another figure that you should quickly figure out is your gross profits. To figure out your gross profits, take your business’ direct revenues and subtract your cost of delivery, which you would’ve figured out above, from your direct revenues. In order to calculate your business’ gross profits. Next, you should work on setting a realistic net profit target. What is your net profit target? This sum is how much profit you’d like your business to make from the product, after you’ve subtracted all of the variable costs which are involved in producing and shipping out your product. If you’re hoping to grow your business it’s a smart idea to try and increase your net profit target by a certain percentage such as 25% in one year. As a realistic goal that you can start working towards.
So if you want to be able to use unit economics in order to help your business increase its profits, not just its revenue, it’s a great idea to use all of the useful information listed above to your advantage. Especially if you’d like your business to have more cash in hand at the end of the day.