D2C teams often split it into layers. CM1 is net revenue minus product cost. CM2 also subtracts fulfilment, shipping, payment fees and returns. CM3 subtracts marketing as well, and is the profit an order actually leaves.
Running paid acquisition on contribution margin instead of revenue is the most important change most growth teams can make, because it tells you what spend is really worth.
Formula
CM2 = Net revenue − Product cost − Fulfilment and shipping − Payment fees − Returns cost
The minimum ROAS and maximum CAC your unit economics can afford, with a full contribution margin waterfall.
Related terms
- Gross marginGross margin is the share of the selling price left after the direct cost of the product.
- Break-even ROASBreak-even ROAS is the return on ad spend at which an order covers its variable costs and its acquisition cost, leaving zero profit.
- Unit economicsUnit economics describes the revenue and costs of a single unit of a business, such as one order or one customer.
Where this comes up
ROAS is not a business metricReturn on ad spend tells you how the platform sees your campaigns. Contribution margin tells you whether the business is better off. Here is how to run paid media on the second. A measurement stack a CFO can trustPlatforms over-claim, analytics under-counts and the order database is the only source that never lies. How to build measurement that holds up in the boardroom.Part of the growth marketing glossary by Shiva Sharma.