M04RunBusiness Foundations· Module 4
Unit Economics
A product can show a healthy margin and still lose money once time, rework and handling are counted.
- Start
- Fix
- Grow
- Finance
- Operations
- ~5 min · Calculation
The business problem
Most businesses know the gross margin of each product. Few know what each unit really costs to sell, make, deliver and support. Costs that are spread evenly across products — staff time, rework, delivery, returns — hide the fact that some products subsidise others.
Why it matters
Growth multiplies unit economics. If each unit loses money after all its costs, selling more makes the problem bigger. Knowing true contribution tells you what to grow, reprice, redesign or stop.
What you will learn
- Calculate contribution per unit, order or customer
- Allocate time, rework and handling costs to the products that cause them
- Recognise when high gross margin hides low real profitability
- Decide whether to grow, reprice, simplify or discontinue a product
Core questions
- What does one more unit really add to profit?
- Which products consume disproportionate time or rework?
- Which orders are too small to be profitable?
- What would change if we stopped selling our least profitable line?
Work through the module
CaseWhat is happening?
Furniture manufacturer, 60 people · Illustrative teaching case
A manufacturer's custom furniture line shows the best gross margin. It also takes most of the workshop's setup time, causes most rework, and delays the standard lines that customers order repeatedly. When workshop hours are allocated by product, custom orders turn out to contribute far less than the price list suggests.
Full teaching case: The Profitable Product That Should Be Killed
DecisionWhat does the leader need to decide?
Grow the custom line, reprice it to reflect its real cost, or restrict it?
FrameworkHow should they think about the problem?
Contribution after complexity
Start with price less direct materials. Then subtract the costs each product actually causes: setup and labour time, rework, delivery, handling and after-sales support. The result — contribution after complexity — is the number to manage.
ToolWhat can they use?
Unit contribution calculatorCalculation
- Price − discounts = net price
- Net price − materials − direct labour = gross contribution
- Gross contribution − setup, rework, delivery and support time = true contribution
- Rank products by true contribution per hour of scarce capacity
ApplicationHow does it apply to their business?
Apply it to your own business:
- Pick your five highest-volume products or services
- Estimate the time, rework and delivery each one consumes
- Re-rank them by true contribution
ImplementationWhat changes?
What should change in the business:
- Set a minimum order size or a charge for small orders
- Reprice or simplify products that consume scarce capacity
- Make true contribution part of product and pricing decisions
ReviewDid it work?
How to tell whether the change worked:
- Has average contribution per order risen?
- Has rework or setup time on the problem lines fallen?
- Are sales staff steering customers towards more profitable lines?
After this module you should be able to decide
Grow the custom line, reprice it to reflect its real cost, or restrict it?
And leave with: True contribution per product, service or order.
Sequence · Business Foundations