Unit Economics: Does Each Sale Make Money?
Compare a sale's price with its variable costs, then check customer acquisition spending and fixed costs. More sales over the same period increase losses when contribution per sale is unchanged and negative, with other costs unchanged.
What a learner can do afterwards
- Work out the contribution from one sale after the costs that vary with it
- Calculate average acquisition cost per new customer from matched spending and customer counts, and compare it with customer contribution
- Explain how more sales over the same period increase losses when contribution per sale is unchanged and negative, with other costs unchanged
1 · Read
Growing a stand means checking how its costs change. Total variable costs rise with activity, such as materials used per sale. Fixed costs stay unchanged in total for a stated period and range of sales, such as an agreed monthly rent. Expansion can raise them. Some bills have both parts. Read the payment terms; wages are not always fixed.
Contribution per sale is price minus variable cost per sale. It is the amount left to cover fixed costs, not final profit. If contribution per sale is negative and price, variable cost per sale and other costs stay unchanged, more sales over the same period increase losses. Positive contribution alone does not prove the business or each acquired customer is profitable.
Average customer acquisition cost is matched acquisition spending divided by new customers gained: share the spending equally among them. Spending £240 to gain 12 customers costs £20 each; check that 12 times £20 is £240. Compare this with contribution from their orders, not revenue alone. Two orders contributing £7 each leave £14, a £6 shortfall against £20. Future orders are uncertain. Do not subtract acquisition spending twice if it is already included in your costs.
For one product with positive contribution, divide fixed costs by contribution per sale to find break-even units. Match periods and assume price and costs stay unchanged within capacity and all units made are sold. With £150 monthly fixed costs and £6 contribution, 25 sales cover £150. Include all other operating costs in the fixed total. Round a fractional result up for whole units because rounding down leaves costs uncovered. This model excludes tax and financing costs.
To check break-even, divide fixed costs by positive contribution per sale, rounding up for whole units. Compare required sales with demand and capacity for the same period. Both must support that volume. Hold each option's price and costs constant within capacity and count all operating costs. Lower fixed costs or variable cost per sale can reduce required sales. A higher price can increase contribution but may reduce demand. Recalculate before expanding; growth may not fix a loss.
Test prices with real buyers to check how demand changes. For each price, subtract variable cost per sale to find contribution per sale, then multiply by sales over the same period. Compare these total contributions. When fixed costs are the same, the option with more total contribution gives the better operating result in this model. The highest contribution per sale need not win if too few people buy.
Check sale contribution, acquisition cost and fixed costs separately. Recalculate when price, demand or capacity changes.
This lesson, its questions and flashcards were written for this dataset. Accounting and business sources informed the concepts.
The readings and flashcards were written for this dataset with new examples. Accounting and business source records informed the concepts; their prose and illustrations are not reproduced.
More to read
Separate the parts of a bill
A workshop pays £80 each month for a room that can handle up to 60 items. Within that month and capacity, the room fee stays £80. If each item uses £4 of materials, making more items increases the materials total.
Some bills combine different charges. A delivery service might charge £25 each month plus £2 for every parcel. Keep the monthly fee separate from the parcel charges when estimating the cost of extra sales.
Read the payment terms. A worker might receive a monthly salary, payment for each item, or both. A second room or machine can also raise costs when the business outgrows its current capacity.
Check a whole-unit break-even estimate
A product sells for £14 and uses £8 in variable costs per unit. Each sale leaves £6 to cover fixed costs. This contribution is not final profit.
Suppose all remaining operating costs total £200 per month. Dividing £200 by £6 gives about 33.33 sales. Since the product is sold in whole units, at least 34 sales are needed to cover these operating costs. At 33 sales, contribution totals £198; at 34, it totals £204.
This estimate assumes unchanged price and unit variable cost, unchanged monthly fixed costs, enough capacity, and that all units made are sold. It excludes tax and financing costs. With positive fixed costs and contribution of zero or less, extra sales cannot reach operating break-even under these assumptions.
A higher price can bring fewer sales
Compare two matched weekly tests for a product with £5 variable cost per unit. At a £9 price, 70 sales contribute £4 each, or £280 altogether. At a £12 price, 35 sales contribute £7 each, or £245 altogether. With the same weekly fixed costs, the £9 test has the better operating result.
The higher price left more from each sale, but fewer sales outweighed that gain. Record both quantities when testing a price.
Also record differences in promotion, product quality and the customers reached. Those differences may affect demand. Test results support a forecast; they do not promise identical sales next week.
Compare customer contribution with acquisition spending
Suppose a campaign spends £180 and gains 15 new customers. Dividing the matched spending by those customers gives an average acquisition cost of £12 each.
A customer's first order contributes £5 after its variable costs, before acquisition spending. That leaves a £7 shortfall against the £12 acquisition cost. Three such orders would contribute £15, leaving £3 after acquisition spending and before other fixed costs.
Three orders are a possibility, not a promise. Use evidence about repeat purchases when estimating customer contribution. Check which costs your calculation already includes, so you do not subtract the same acquisition spending twice.
2 · Watch
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Where it sits
Learn first
Where this leads
Jobs that lean on this skill. Follow one to see everything it is built on.
8 questions wait behind this lesson, each with its answer explained. Every answer feeds the sky: stars light as they are learned, and dim when it is time to come back.