Unit Economics & COGS

Unit Economics & COGS

If you only learn one finance concept before launching your business, make it this one. Unit economics answers the simplest and most important question in business: do you make money every time you sell something?

It sounds obvious, but plenty of businesses — including ones run by adults with MBAs — fail because they sell products for less than it costs to make them. Once you understand unit economics, you will never make that mistake.

What Is COGS?

COGS stands for Cost of Goods Sold. It is the total cost of everything that goes directly into making or delivering one unit of your product or service.

COGS includes:

• Raw materials and ingredients
• Packaging for that specific item
• Any direct labour costs (if you pay someone to help make it)
• Transaction fees (e.g., payment processing)

COGS does not include:

• Your phone bill
• Marketing costs
• Equipment you bought once and use for all products
• Your time (unless you are paying yourself a set rate per item)

Those other costs are called overheads or fixed costs. They matter, but they are separate from COGS.

The Core Formula

Here is the formula that runs every product business on Earth:

Profit Per Unit = Selling Price - COGS

And from that:

Gross Margin (%) = (Selling Price - COGS) / Selling Price x 100

A healthy gross margin for a small product business is typically 50-70%. For services, it can be 70-90% because you have fewer material costs.

Worked Example 1: Physical Product (Handmade Soap)

You sell a bar of handmade soap for £4.50. Here is what goes into making one bar:

Profit per bar: £4.50 - £1.58 = £2.92

Gross margin: £2.92 / £4.50 x 100 = 64.9%

That is a strong margin. For every £1 of soap you sell, you keep about 65p after direct costs. The remaining 65p needs to cover your overheads (marketing, stall fees, etc.) and your profit.

Worked Example 2: Food Product (Brownies)

You sell a box of 4 brownies for £5.00.

Profit per box: £5.00 - £2.40 = £2.60

Gross margin: £2.60 / £5.00 x 100 = 52.0%

That is acceptable but tighter. If ingredient prices go up even slightly, your margin shrinks fast. You might consider raising the price to £5.50 or finding a cheaper chocolate supplier.

Worked Example 3: Service (Maths Tutoring)

You charge £15 per hour for maths tutoring.

Profit per session: £15.00 - £2.21 = £12.79

Gross margin: £12.79 / £15.00 x 100 = 85.3%

Services have excellent margins because your main input is your time and knowledge, not expensive materials. The trade-off is that services are harder to scale — you only have so many hours in a week.

Worked Example 4: Digital Product (Notion Templates)

You sell a study planner Notion template for £3.99.

Profit per sale: £3.99 - £0.77 = £3.22

Gross margin: £3.22 / £3.99 x 100 = 80.7%

Digital products have the best unit economics because there is no physical material cost. Once you create the template, selling 1 copy or 1,000 copies costs almost the same.

The Break-Even Calculation

Once you know your profit per unit, you can calculate how many sales you need to cover your startup costs (the money you raised on Futurepreneurs).

Break-Even Units = Total Startup Costs / Profit Per Unit

Using the soap example:

• Startup costs: £150 (equipment, initial supplies, branding)
• Profit per bar: £2.92
• Break-even: £150 / £2.92 = 52 bars

So after selling 52 bars of soap, you have paid back your startup costs. Every sale after that is pure profit (minus overheads).

Margin Danger Zones

Watch out for these warning signs:

How to Improve Your Unit Economics

If your margins are too thin, you have exactly three levers:

1. Reduce COGS

• Buy ingredients or materials in bulk (usually 10-30% cheaper)
• Find alternative suppliers — compare at least 3 before buying
• Simplify your packaging (do you really need tissue paper AND a box AND a sticker?)
• Use free tools where possible (Canva free tier, free shipping over certain thresholds)

2. Increase Your Selling Price

• If your product is genuinely good, people will pay more than you think
• Test a higher price with a small batch before committing
• Add perceived value: better packaging, a handwritten thank-you note, a bonus item

3. Reduce Waste

• Track how many products you make versus how many you sell
• Food businesses especially: only make what you can sell within the shelf life
• Order materials in the right quantities — buying 10 kg of wax when you need 3 kg ties up cash

Calculating COGS for Your Business

Follow these steps:

• List every ingredient, material, or supply that goes into one unit of your product or service
• Find the real price of each item (check the actual shop or website)
• Calculate the per-unit cost — if you buy a 1 kg bag of sugar for £1.10 and each batch uses 200 g, your per-unit sugar cost is £0.22
• Add transaction fees — Stripe charges 1.4% + 20p for UK cards
• Add up the total — that is your COGS

Next Steps

Ready to calculate your own unit economics? Head to Tool 7: Unit Economics Calculator in the Tools section. Plug in your costs and selling price, and it will calculate your COGS, profit per unit, gross margin, and break-even point automatically.

Remember: if the maths does not work for one unit, it will not work for a thousand units. Get your unit economics right first, and everything else becomes easier.