Understanding Unit Economics: Maximizing Profit through Traffic and Discounts

– Many ecommerce brands do not understand unit economics and treat all sources of traffic the same, missing out on opportunities.
– Understanding unit economics involves considering the cost of the good, retail price, and cost to acquire the customer.
– Discounting can be beneficial if it leads to a decrease in cost to acquire a user and ultimately increases profit.The key action item is to understand the different sources of traffic and treat them accordingly, rather than treating all sources of traffic the same.I’m convinced that most e-commerce brands don’t actually understand unit economics based on how they come up with offers and treat paid acquisition. The number one thing I see brands do wrong is treat all sources of traffic the same. It’s consistent across all e-commerce, and there are massive opportunities that are being missed.

Here’s how I know people don’t really get it. Not all sources of traffic should be treated the same, YET most of the time brands treat them the exact same. There are three main parts to understanding unit economics:

1. Cost of the Good
2. Retail Price of the Good
3. Cost to Acquire the Customer

As a good rule of thumb, you should strive to get at least 4.5x the Cost of good as the retail price. (I personally look for at least 6x)

Cost – $20
Retail – $100
CAC – $50

Now you factor in the discounts you can offer to still remain profitable on this transaction. (I do this in a spreadsheet calculator for our best-selling products – these are the ones we usually focus on for ads) In this particular example, you can discount up to 30% to break even. So in 5% increments, you can test 10%, 15%, 20%, 25%, and still remain profitable on the transaction assuming nothing changes.

BUT there’s a variable that should change all things being held equal. That variable is CAC. If your product and the buying behavior are price-dependent, when you go to a 25% off discount logically, you should see a corresponding drop in CAC and an increase in conversion rate.

Sure Jon, but I’m not making more money, I’m just discounting. Isn’t discounting bad? This is a false narrative, with a lack of understanding of unit economics. The elasticity of a price relative to an offer has a direct impact on unit economics, but isn’t tied to the product, it’s also tied to variable costs, the cost to acquire a user. If at 25% off I can decrease my CAC by $10 or 20%, that shifts to my profit. So now instead of making $5 on the 25% off, I make $15. So with a deeper discount, I can make more money. HUH?!? It’s math, people. But like most people in marketing, math and data aren’t things that are common knowledge. I can’t influence my costs, they are largely fixed. I can influence retail prices to a degree but they are more fixed than other things. CAC though, I can influence. Getting that first sale is more important than protecting margins. If people don’t buy and try your product you can’t get feedback and grow your footprint in the wild. If no one buys and tries, there’s not a lot you can do. Ironically, if you understand levers, a deeper discount can make you more profit with less revenue when balancing all the costs. And at the end of the day, I’d rather have a profitable company than one that brags about revenue. But true unit economics experts are running the numbers about all the levers that are present during a journey. #ecommerce #uniteconomics #marketinghttps://www.linkedin.com/in/jivanco

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