Day 12

Unit Economics

Your Homework

Block (formerly Square) is an online payments company that provides software and hardware tools to help businesses run and grow their operations. Take a look at the Block 2022 10-K (or "annual report") and locate their Income Statement.

1. What is the gross margin % by product line and for net revenue overall?

(Hint: Find the revenue by product line and subtract the cost of revenue by product line for the year ending Dec 31, 2022. Divide the resulting gross margin for each product line by total net revenue to calculate the gross margin % for each product line.)


2. What possible conclusions can be drawn?

Scroll down to see answers.

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Answers

1a. Transaction based revenue gross margin % = ($5,701,540-$3,364,028)/$5,701,540 = 41%
1b. Subscription and services based revenue gross margin % = ($4,552,773-$861,745)/$4,552,773 = 81%
1c. Hardware revenue gross margin % = ($164,418-$286,995)/$164,418 = -75%
1d. Bitcoin revenue gross margin % = ($7,112,856-$6,956,733)/$7,112,856 = 2%
1e. Total net revenue gross margin % = ($17,531,587-$11,539,695)/$17,531,587 = 34%

2. Subscription and services based revenue is Block's most profitable product line followed by transaction based revenue. To improve overall company profitability of 34% gross margin, Block could sell more higher margin subscription services to offset the lower margins of their hardware and bitcoin products. Block could achieve a higher margin from their hardware business by sourcing lower cost hardware or by increasing prices since hardware sales are operating at a negative gross margin. It’s possible that Block is intentionally subsidizing the hardware in order to grow their subscription and transaction revenue lines faster. Block will need to monitor the long term viability of Bitcoin as a source of payment given current gross margins are only 2%.

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