CM1 is net revenue minus the cost of goods. CM2 subtracts the costs of getting each order to the customer: shipping, packaging, payment fees, returns and RTO. CM3 subtracts marketing, usually ad spend, and is the profit an order leaves to pay for salaries, rent and everything else.

Splitting contribution this way shows where margin is lost. A brand with a healthy CM1 and a weak CM2 has a logistics or returns problem; a healthy CM2 and a negative CM3 means growth is being bought at a loss.

Formula

CM1 = Net revenue − Product cost
CM2 = CM1 − Shipping − Packaging − Payment fees − Returns and RTO
CM3 = CM2 − Marketing

Example

Net revenue ₹10,00,000, product cost ₹3,00,000 → CM1 ₹7,00,000. Fulfilment and fees ₹1,80,000 → CM2 ₹5,20,000. Ad spend ₹3,50,000 → CM3 ₹1,70,000.

Work it out: P&L builder

CM1, CM2, CM3 and EBITDA per order and per month, with RTO, COD, channel comparison and a board-ready report.

Related terms

Where this comes up

How to calculate contribution margin for a Shopify storeA step-by-step guide to CM1, CM2 and CM3 for D2C brands: what goes in each layer, the costs most brands miss, and how to turn it into a daily number.

Part of the growth marketing glossary by Shiva Sharma.