Growth is great — unless it’s sending your profits down the drain. Understanding unit economics can save you from scaling into bankruptcy.
Why Growth Can Be a Double-Edged Sword
For a lot of new CPG founders, the first big retail order feels like a dream come true. You picture your product on the shelf, shoppers grabbing it, and sales numbers climbing. But there’s a trap many brands fall into — chasing growth without checking if each sale actually makes money.
I’ve seen brands triple their distribution in a year and still lose money. Why? Because they didn’t understand their unit economics. The more they sold, the more they lost. It’s a harsh lesson, but one that can be avoided with a bit of upfront math and a clear-eyed look at your numbers.
What Exactly Are Unit Economics?
In plain English, unit economics is about understanding how much money you make (or lose) on each unit of your product sold. It’s not just the cost of ingredients or packaging — it’s the full picture, including manufacturing, shipping, trade spend, and any promotional discounts.
Think of it this way: if every time you sell one unit you lose 50 cents, selling 10,000 units just means you lost $5,000 faster.
The team at FoodBevy explains it well — unit economics is the lens that shows you whether your growth is actually sustainable. Without it, you’re flying blind.
Breaking Down the Math (Without the Headache)
Let’s say your product sells for $4.99 at retail. Here’s what you need to account for to see if it’s profitable per unit:
- COGS (Cost of Goods Sold): Ingredients, packaging, manufacturing labor
- Freight: Getting your product to the retailer or distributor
- Trade Spend: Promotions, discounts, or slotting fees
- Distributor Margin: Their cut before it hits retail
- Retailer Margin: The markup that determines your shelf price
Once you subtract all of that from your selling price, you’re left with your gross profit per unit. That number tells you if you’re making money on each sale — and if it’s enough to cover your overhead.
The Hidden Costs That Sneak In
One big mistake I see is ignoring small but frequent costs that eat into margins. Maybe it’s the extra $0.15 per unit for a custom label run, the fuel surcharge on freight, or the free cases you give away for promotions. These add up quickly.
In one case, a beverage brand I worked with thought they had a healthy $1.50 profit per unit. After accounting for all their free samples, last-minute air shipments, and higher-than-expected distributor fees, they were actually only making $0.40 per unit — not nearly enough to sustain growth.
Why Unit Economics Drives Every Other Decision
When you truly understand your unit economics, you make smarter decisions about:
- Pricing: You know the minimum price you can sell at and still make money
- Promotions: You can calculate exactly how much a BOGO or discount will cost you
- Channel Strategy: You can focus on retailers or channels that give you the healthiest margins
- Scaling: You can project what will happen when you double or triple production
The reality is, sometimes it’s better to say no to a big retail opportunity if the margins aren’t there. More sales isn’t the same as more profit.
A Real-World Turnaround
I once worked with a snack brand that landed a national grocery chain placement. They were thrilled — until they realized the promotional requirements and freight costs would wipe out their profits. We sat down, ran the numbers, and renegotiated their promotional plan with the retailer. We also optimized their shipping to cut freight costs by 18%. The result? They went from losing $0.25 per unit to making $0.60 — and the placement became a sustainable win.
The Role of Trade Promotions
Trade promotions are a powerful tool, but they can wreck your margins if you’re not careful. Whether it’s a temporary price reduction, BOGO, or endcap display fee, every promotion needs to be run through your unit economics model before you commit.
The experts at MSPS highlight that during inflationary periods, it’s even more important to assess the true cost and ROI of promotions. If your cost of goods is rising, that “great deal” for shoppers might be a disaster for your bottom line.
Using Data, Not Guesswork
The smartest brands track their unit economics monthly, not just once in a while. Costs change — ingredients get more expensive, freight rates fluctuate, promotions ramp up during certain seasons. By reviewing regularly, you can catch margin erosion before it becomes a problem.
I’ve built this habit into how I work with every brand we partner with. It’s also why we created our Unit Economics Tool — so you can plug in your numbers and get a clear picture without spending hours in spreadsheets.
Connecting Unit Economics to Your Growth Plan
Understanding your unit economics isn’t about slowing down growth — it’s about making sure that growth makes you money instead of draining it.
Here’s how it connects to other areas of your business:
- Retail Expansion: Only go after stores and channels where you can hit profitable velocity
- Marketing Spend: Know how much you can spend to acquire a customer and still break even
- Production Planning: Scale production in a way that lowers per-unit costs without flooding the market with inventory
These connections are why we emphasize it in our Process with every client.
The Mindset Shift Small Brands Need
Many founders get emotionally attached to “being in” a certain store or hitting a certain sales milestone. But the brands that last are the ones that make decisions based on the math, not the ego boost. It’s not as exciting to walk away from a high-profile retail deal because the margins aren’t there — but it’s often the smartest move.
I’ve seen this play out in reverse too. A brand that focused on mid-tier regional grocers with great margins grew steadily and profitably, then used that profitability to fund a successful national launch later.
Next Steps: Making Unit Economics Work for You
If you haven’t already, take the time to map out your full cost structure per unit. Use real numbers, not estimates. Then ask yourself:
- Am I profitable per unit in my current channels?
- What happens to my profit if I run a promotion?
- How will my costs change as I scale?
Once you have those answers, you can make confident decisions about where to focus your energy, which opportunities to chase, and which ones to pass on.
The bottom line? Growth is only good if it’s profitable. Master your unit economics now, and you’ll give your brand the foundation it needs to thrive for years to come.