Online retail businesses fail at a high rate despite growing revenue, and the reason is almost always unit economics.
Gross margin
Revenue less the cost of goods.
Which is where analysis frequently stops and where it should begin.
A healthy gross margin can still produce losses after everything else.
Fulfilment costs
Picking, packing, shipping and packaging materials.
Which are substantial and are frequently underestimated.
Free shipping means the merchant pays it, not that it costs nothing.
Returns
Return shipping, processing and unsellable stock.
Which in apparel can consume a large share of margin.
Return rates vary enormously by category and must be modelled.
Payment processing
Card fees and chargebacks.
Which are a percentage of every transaction.
They compound with returns, since the fee is frequently not fully refunded.
Acquisition cost
Advertising to acquire each customer.
Which has risen substantially as platform advertising costs increased.
Businesses built on a fixed acquisition cost assumption have failed when it rose.
Contribution margin
What remains after all variable costs.
Which is the figure that determines whether growth helps or hurts.
Negative contribution margin means every additional sale loses money.
Repeat purchase
Whether customers buy again without further acquisition cost.
Which is what makes acquisition spending viable.
Single-purchase categories require the first sale to be profitable alone.
The calculation that matters
Contribution per order after every variable cost, against acquisition cost, with realistic repeat assumptions.
Businesses that do this honestly before scaling generally survive.
Cohort profitability
Tracking whether a group of customers eventually covers their acquisition cost.
Which is the honest measure of whether growth is working.
Aggregate revenue growth tells you nothing about this.
Marketplace versus direct
Selling through platforms carries commission and reduces customer relationship.
Which is a trade of margin for reach.
Platform-dependent businesses face concentration risk that direct sellers do not.
Inventory risk
Stock purchased before knowing what will sell.
Which ties up cash and produces markdowns.
Print on demand and dropshipping remove this and reduce margin.
Subscription models
Recurring revenue changes the acquisition calculation substantially.
Which is why so many product businesses attempt it.
Retention determines whether it works.
The honest test
Contribution margin per order after every variable cost, with realistic return and repeat rates.
Discounting effects
Promotions reduce margin on customers who would have bought anyway.
Which makes incrementality testing relevant here too.
Persistent discounting trains customers to wait.
Shipping thresholds
Free shipping above a spend level.
Which raises average order value and must be set above the point where it pays.
Setting it too low costs margin on orders that would have happened regardless.
Packaging
Materials, labour and dimensional weight effects on shipping cost.
Which is a genuine optimisation area.
Right-sizing reduces both material and shipping cost simultaneously.
Customer service
Support cost per order.
Which is a variable cost frequently treated as overhead.
Categories with high query rates carry a real per-order cost.
Before scaling
Establish that an additional order makes money after everything, and only then increase spending.
The full cost of an order
Product cost, payment processing, pick and pack, shipping, returns and support.
Which together are frequently larger than assumed.
Contribution per order after all of these is the number that matters.
Returns
Return rates vary enormously by category.
Which makes category-level accounting necessary.
Apparel return rates can invalidate margin calculations built on gross figures.
Payment costs
Processing fees, chargebacks and failed payment recovery.
Which are small percentages on meaningful volume.
They are worth negotiating once volume justifies it.
Fulfilment choices
In-house against third-party logistics against marketplace fulfilment.
Which trade fixed cost against per-order cost.
The right choice changes with volume and is worth revisiting.
Marketplace against own site
Commission and reach against acquisition cost and control.
Which produce different unit economics for the same product.
Many businesses run both and account for them separately.
Inventory cost
Capital tied up in stock and the cost of holding it.
Which is real and absent from most margin calculations.
Slow-moving stock consumes cash and eventually gets discounted.
Cohort behaviour
Whether customers order again and how frequently.
Which determines whether acquisition cost can be recovered across orders.
Single-purchase categories must make money on the first order.
Attribution problems
Which order a given advertisement produced.
Which has become harder with tracking restrictions.
Holdout tests are the practical response here as elsewhere.
Building the model
One spreadsheet row per cost, calculated per order, by category.
Which takes an afternoon and changes decisions.
Businesses that have done it can name their contribution per order without hesitation.
A closing caution
None of this is prescriptive. Businesses differ by sector, by scale and by stage, and practices that work well in one context fail in another for reasons that are not always visible from outside.
What is consistent is that the businesses handling these questions well tend to have written something down, measured it in a defined way, and reviewed it on a schedule rather than when a problem forces the issue.
Where a decision carries legal, tax or employment consequences, professional advice specific to your jurisdiction is worth the cost, and this article is general description rather than advice.