Unit Economics
Determine your Contribution Margin and Break-Even ROAS to ensure solvency.
Lesson Objective
A common saying in retail is: "Turnover is vanity, profit is sanity, but cash is king."
Brands post good monthly revenue and still go insolvent, because every order lost money and more orders made it worse. This module finds your , which is the cash left from a sale once the variable costs and advertising are paid, and your , which is the at which you make exactly nothing.
Strategy
Profit has to account for every cost of an order, including the ad that found the customer. New founders often calculate it like this:
That leaves out what it costs to fulfill the order and what it costs to find the customer. The full version looks like this:
- Selling Price and Shipping Charged: everything the customer pays at checkout.
- Landed Cost: the total cost to make one unit and get it to your warehouse, covering formula, bottle, lid, seal, label and freight. You'll also hear it called unit .
- Fulfillment: your warehouse's fee to the order, plus carrier postage.
- Merchant Fees: payment processors like or Shopify Payments charge around 2.9% + $0.30 per transaction.
- Ad Spend: your , meaning the ad spend it takes to produce one new order.
The calculator leaves out refunds and chargebacks, which come out of your contribution after the fact. At a 5% refund rate, 5% of your revenue goes back out the door.
The 2.9% + $0.30 rate is also only a benchmark for standard processors. Supplement brands often end up on high-risk merchant accounts, with higher rates and a share of revenue held in reserve, which the payment processing module covers. Model with the rate you expect to be paying in six months.
Action Plan
Enter Your Own Numbers
Two inputs in the header stay the same however many bottles a customer buys:
- Cost per order: the ad spend it takes to produce one sale. $25 to $40 is a normal testing range on .
- Cost per bottle: the landed cost of a single bottle. Around $6 is typical for a capsule product, and the calculator multiplies it out for the bundles.
The rest change by tier:
- Selling price: the retail price of that tier, before shipping.
- Postage cost: what you pay for pick, pack and carrier together, commonly $7.50 to $11.50 for a US package under a pound.
- Shipping charged: what the customer pays, usually $5 to $8 on a single bottle and nothing on the bundles.
The processing rate sits under the payment processing rate toggle at the bottom. Open it and set the rate you expect to pay instead of the default, because a high-risk account changes every figure above it.
Read the Health Check
Each tier reports three indicators against a target.
- , calculated as
(Selling Price - Total COGS) / Selling Price. Below the target, you don't have the product to support a meaningful acquisition cost, and better media buying won't fix that. - Break-even ROAS, calculated as
Total Revenue / (Total Revenue - Variable Costs Before Ads). This is the return on ad spend you need to make exactly zero. The lower it is, the more room your media buyer has to work with. - Cash per order, calculated as
Total Revenue - Variable Costs - Cost per Order. This is what actually lands in the bank after acquiring the customer. Anything near zero chokes your even when the percentages look fine.
A tier can pass on margin and ROAS and still fail on cash, which is what usually happens to the single bottle, so check all three.
Asset
Enter your numbers in the calculator below, as described in the steps above. It reports each tier's contribution margin and break-even ROAS as you go.
What Actually Reaches Your Account
Retail and shipping in, product, postage, processing and ads out.
If the single bottle shipped free
The $6.95 you currently charge for postage is the only thing absorbing a $8.00 fulfillment cost. Take it away and the single bottle goes from -$3.57 to -$10.32 per order.
An acquisition loss you planned for can be earned back on a second order or a subscription. A loss this size on every checkout is a different thing, and it scales with your ad spend.
Once postage and processing come out, a single bottle actually returns -$3.57. Your three-bottle tier returns $26.68 and needs 1.54x return on ad spend just to break even.
1 Bottle
What you pay
What they pay
Health check
3 Bottles
What you pay
What they pay
Health check
6 Bottles
What you pay
What they pay
Health check
Free Shipping on Single Bottles
Free shipping is the easiest promise to make on a product page and the most expensive one on a single bottle, because the postage you charge is usually all that stands between that tier and a loss.
The panel above the tiers in the calculator shows what free shipping would do to your single bottle. Change the shipping you charge on that tier and watch which side of zero it lands on.
What to do instead: find the retail price at which the single bottle covers its own $8 to $11 of pick, pack and postage, and keep free shipping for the bundles, where the extra revenue covers it comfortably. On a $6 bottle with a $30 acquisition cost, that break-even sits somewhere near $50, which is why most brands charge postage on the single bottle and give it away on the three-pack.
You now have a contribution margin for each tier and a break-even ROAS to hold your media buying to. The calculators carry these figures forward, so the next module opens with your numbers already in it.
This is one module of The Foundry
The Foundry takes a supplement brand from formula to first reorder, with a working tool in every module and your numbers carried between them.