Introduction
Whether you’re running an eCommerce store, a D2C brand, or a small business, understanding your unit economics helps you know if your business is truly profitable or just running on luck.
In this article, we’ll explain the most important financial terms — Revenue, COGS, Gross Margin, Markup, EBITDA, Net Profit, and Break-Even Point — all in simple language with real-life examples.
1. What is Unit Economics?
Unit Economics measures how much profit or loss you make per unit of your product or service. It’s the foundation of a sustainable business model.
Formula:
Unit Economics = Revenue per Unit – Cost per Unit
Examples:
- You sell a T-shirt for ₹500 and it costs ₹320 → Unit profit = ₹180
- A coffee sells for ₹150 and costs ₹70 → Unit profit = ₹80
- A SaaS app earns ₹200 per user monthly, costs ₹50 to serve → Unit profit = ₹150
Note : If your unit profit is positive, your business can scale sustainably.
2. Revenue
Revenue is the total income earned from selling goods or services before any expenses.
Formula:
Revenue = Selling Price × Quantity Sold
Examples:
- You sell 100 shirts at ₹500 → ₹50,000 revenue
- A bakery sells 50 cakes at ₹400 → ₹20,000 revenue
- An influencer earns ₹10,000 from ads + ₹5,000 from sponsorships → Total Revenue = ₹15,000
Note : Track gross revenue (before returns) and net revenue (after discounts and refunds).
3. Cost of Goods Sold (COGS)
COGS includes all direct costs involved in producing or delivering a product.
Formula:
COGS = Direct Material + Direct Labor + Direct Overheads
Examples:
- Fabric ₹150 + stitching ₹50 + packaging ₹30 + shipping ₹70 = ₹300 COGS per shirt
- Coffee beans ₹20 + milk ₹15 + cup ₹10 + labor ₹25 = ₹70 per coffee
- A SaaS company spends ₹100/user on servers and maintenance
Note : Lowering COGS increases your profit per sale.
4. Gross Profit and Gross Margin
Gross Profit shows how much you earn after covering production costs.
Gross Margin expresses that as a percentage of revenue.
Formulas:
Gross Profit = Revenue – COGS
Gross Margin (%) = (Gross Profit ÷ Revenue) × 100
Examples:
- ₹50,000 revenue – ₹30,000 COGS = ₹20,000 Gross Profit → 40% margin
- ₹1,00,000 revenue – ₹60,000 COGS = ₹40,000 profit → 40% margin
- 200 coffees at ₹150 = ₹30,000 revenue, COGS ₹14,000 → ₹16,000 profit → 53% margin
Note: High gross margin = efficient pricing and production.
5. Markup
Markup shows how much extra you charge over your product cost — it’s how you decide selling price.
Formula:
Markup (%) = ((Selling Price – Cost Price) ÷ Cost Price) × 100
Examples:
- Cost ₹300, Price ₹500 → Markup = 66.7%
- Cost ₹800, Price ₹1,200 → Markup = 50%
- Cost ₹1,000, Price ₹1,800 → Markup = 80%
Note: Markup is based on cost, while margin is based on revenue.
6. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA measures how much your business earns from operations before considering financing or accounting decisions.
Formula:
EBITDA = Revenue – (COGS + Operating Expenses)
Examples:
- Revenue ₹1,00,000 – (₹40,000 COGS + ₹30,000 expenses) = ₹30,000 EBITDA
- A restaurant earns ₹5,00,000, spends ₹3,00,000 → ₹2,00,000 EBITDA
- A SaaS startup earns ₹10L, spends ₹6L → EBITDA ₹4L
Note : EBITDA helps investors understand your core profitability.
7. Net Profit and Net Profit Margin
Net Profit is the money left after all expenses — including operating costs, interest, and taxes.
Net Profit Margin shows how much of your revenue becomes actual profit.
Formulas:
Net Profit = Total Revenue – Total Expenses
Net Profit Margin (%) = (Net Profit ÷ Revenue) × 100
Examples:
- ₹1,00,000 revenue – ₹90,000 expenses → ₹10,000 net profit → 10% margin
- ₹5,00,000 revenue – ₹4,50,000 expenses → 10% margin
- ₹50,000 revenue – ₹47,000 expenses → ₹3,000 net profit → 6% margin
Note : Net Profit shows the true financial health of your business.
8. Break-Even Point (Bonus Term)
Break-Even Point is when your total revenue equals your total cost — you’re not losing or making money yet.
Formula:
Break-Even Units = Fixed Costs ÷ (Selling Price – Variable Cost per Unit)
Examples:
- Fixed Cost ₹1,00,000, Selling Price ₹500, Variable Cost ₹300 → 500 units to break even
- Your app costs ₹10,000/month to run, earns ₹100/user → need 100 paying users to break even
- Your bakery’s monthly cost ₹50,000, each cake ₹500, cost ₹250 → need 200 cakes to break even
Note : Once you cross the break-even point, every sale adds to your profit.
Conclusion
Knowing financial terms like Revenue, COGS, Gross Margin, Markup, EBITDA, Net Profit, and Break-Even Point helps you make data-driven business decisions.
They aren’t just accounting words — they’re your roadmap to growth.
Keep tracking them, improve one metric at a time, and you’ll build a business that truly earns, not just sells.
unit economics
business finance basics
startup finance
COGS meaning
gross margin formula
markup vs margin
EBITDA explained
net profit margin
break-even point
revenue model
financial terms for entrepreneurs
profitability metrics
