Ask an Underwriter: What are unit economics and why are they so key for Amazon?

A sports equipment founder in Australia writes:

Everyone keeps banging on about "unit economics," especially when it comes to selling on Amazon. Honestly, I'm a bit confused by what it does and doesn't mean, but I know that it's something I really ought to get my head around.

Basically, I need the "Amazon Unit Economics for Dummies" rundown, so I can finally understand its impact on my business and how to make sure I'm not just chasing sales that end up costing me in the long run. Please help me understand:

• What are unit economics when it comes to Amazon? What should I aim for?
• Why is understanding unit economics so crucial for success on Amazon?
• What happens if my unit economics look bad? And how do I fix them?

What are unit economics and why are they so key for Amazon?

Let’s face it – 2025 has brought tricky challenges for Amazon sellers in particular. With the introduction of US tariffs, margins are extremely tight, and it’s essential to be even more strategic about how you sell.

According to Reuters, some Amazon sellers are even pulling out of Prime Day (whose deadline is May 23) amid these hikes, or else they are looking at reducing the amount of products they’re willing to discount for the event.

The cost of involvement can be considerable. Amazon takes a 15% commission on each unit sold, excluding fees to advertise discounts, such as a $1,000 cost to have a discount highlighted as a “Best Deal” or $500 to have an item highlighted as a “Lightning Deal".

Many are also choosing to increase their prices. CNBC reports that prices on Amazon have increased an average of 29% across nearly 1,000 categories, including clothing, jewelry, household items, office supplies, electronics and toys.

It’s never been a more important time to take a long, hard look at your unit economics. So, what should every seller know about their unit economics, and what are the levers they can pull to improve them?

Answering this important question is Robert Griffith, Credit Lead at Wayflyer, who reviews the financial health (and unit economics) of hundreds of Amazon sellers every month.

But before you dive in… Want the latest insider insights like these, delivered straight to your inbox? Sign up for our brand new newsletter.

What are unit economics and why are they so important to Amazon sellers in particular?

Unit economics are a measure of a business’s ability to produce, market and deliver its product in a profitable manner. In other words, unit economics directly correlate with a seller’s contribution margin.

While unit economics are a broad term for per-product profitability, contribution margin is the more widely-used industry term that consolidates various ratios into one metric.

For Amazon sellers, unit economics typically look like this:

Contribution margin = Gross margin (i.e. income - cost of goods sold) - marketplace fees - marketing spend

To put it simply, strong unit economics are a key pillar upon which any good eCommerce business is built, especially on Amazon.

Getting your product in customers’ hands at a good margin enables you to run a profitable business, generate positive cashflow and scale more easily than at a lower margin.

What are some common mistakes Amazon sellers make when it comes to interpreting their unit economics?

1. Inaccurate accounting of product costs

Firstly, mistakes in accounting for product costs can cause issues for sellers who aren’t careful to triple-check these calculations.

Take for instance a hypothetical P&L (Profit and Loss statement) that has a 10% contribution margin for the fiscal year in total.

This may seem like an acceptable result. But now consider that in this hypothetical situation, the founder has just discovered that they’ve been accidentally underreporting product costs by 6%.

Now, depending on what this business’s fixed costs look like, this minor variance could take what was previously believed to be a profitable company, to a loss-making company.

2. Miscalculations of the true cost of invoices

Similar to product costs, shipping partners, marketing agencies and in rare cases, Amazon themselves, may over- or undershoot the true cost of an invoice, or operating teams may have trouble compiling their accounting data.

Mistakes like these happen every day, and it doesn’t take a lot for a 1% variance here and a 3% variance there really add up.

This is why it’s so important for sellers to have a fine-tuned accounting process that they can count on to give accurate information.

The most important thing to remember here is that you can’t begin to analyze your contribution margin if your starting data is faulty.

Why do you consider unit economics when evaluating applications?

Good unit profitability forecasts not only a business’s ability to generate positive cashflow, manage debt service and achieve profits, it also predicts how well that seller will be able to scale over time.

Let’s look at a real-life example:

Seller 1:

Contribution margin: 3%

2024 revenue: $250,000

2024 contribution profit: $7,500

2025 revenue: $500,000

2025 contribution profit: $15,000

Seller 2:

Contribution margin: 15%

2024 revenue: $250,000

Contribution profit: $37,500

2025 revenue: $500,000

2025 contribution profit: $75,000

What does this example show us about the power of unit economics as a metric?

In this example, both businesses are doing the same level of revenue, yet their take home to cover fixed costs and generate a level of profit is vastly different.

As these two businesses scale, seller 1 will find it much more difficult to generate to keep growing, even with outside working capital funding.

Even if the demand for their product is there, they will find it difficult to outrun their unit economics and generate enough margin to sustainably scale that business. They simply haven’t generated enough marginal cash to continue growing.

Looking at this example from the credit risk perspective, funding providers view sellers with stronger unit economics as:

• more resilient to issues or interruptions
• better able to manage repayments of funding
• less prone to situations such as failed payments and overdrafts

What can we learn from Wayflyer’s customer data about unit economics for Amazon sellers?

When our data team analyzed around 4,500 Amazon customers, we found that their average ad spend per year amounted to just shy of $90,000. In a channel in which appearing high up in the search results is paramount, it isn't a surprise that this would be a considerable expense, at about $7,500 per month.

And when it comes to contribution margin, the average yearly figure per customer was $480,654 or around $40,000 per month. However, this figure will obviously vary a lot from business to business depending on your cost structures, industry changes and pricing strategies.

What if my unit economics look bad? How do I fix them?

Assuming you’ve done all within reason to optimize your product cost, there are still a few levers to be pulled to improve your contribution margin.

1. Streamline your freight process

Firstly, ensure your pre-Amazon freight process is as optimized as possible. Do you need an Fulfillment By Amazon (FBA) prep center, or can you direct ship to FBA? Are you currently air freighting goods that can be brought in via ocean freight?

Sellers should ensure their freight operation is as efficient as possible. So much emphasis is placed on FBA fulfillment and the fees Amazon charges, but valuable margin can be lost before goods are even loaded into an FBA center.

2. Lower your net marketplace fees

Secondly, try to leverage solutions within the Amazon ecosystem to lower your net marketplace fees.

A good example of this is AWD (Amazon Warehousing and Distribution). Sellers that need to keep a lot of stock close to FBA, yet are being pinched by storage fees, may find a solution in AWD.

This can work particularly well for brands that are planning a big demand increase, but want to hedge against having to pay long-term storage fees if plans change.

3. Be smarter about your ad spend

Finally, you need to understand the place of ad spend as an Amazon seller. Our most successful brands see Amazon advertising as a means to quickly energize the market when they launch new products.

Once a product launches, the brand will use ad spend to ramp this new Amazon Standard Identification Number (ASIN) into strong page rankings, then let the product page take over from there.

If you’re finding it hard to maintain order volume on an established product without heavy ad spend, you might consider reworking that ASIN as you may be losing valuable margin on unnecessary marketing.

Can you share any ideal KPIs that brands should aim for when it comes to their unit economics?

Every seller’s situation is unique, so it’s hard to share a one-size fits all metric that works for everyone. The key here is really understanding the structure of your business. Here are some vital questions to ask to quickly figure out:

How large is your fixed cost base?

If you have higher payroll or other fixed costs you will need a stronger contribution margin to offset this. Conversely, if you have lean fixed costs, you may be able to afford to go thinner on contribution and still achieve profitability.

What is your objective for your brand?

This will help to inform target contribution as much as anything. If your goal for the current period is to hyper scale, you may sacrifice (temporarily) your unit economics in the form of increased ad spend in order to achieve growth targets.

On the other end of the spectrum, if profitability is the current goal, you should be laser focused on optimizing your contribution margin.

So in this way, the same brand could have wildly different targets for contribution between different years depending on their objectives.