Contribution margin (CM1/2/3)

Formula

Revenue - COGS - variable costs (fulfillment, returns, processing, [+CAC for CM3])

Unit

$ or %

Models

E-commerce, Marketplace, Hardware

What it is

Contribution margin (CM) is the revenue remaining after subtracting variable costs, and it is typically calculated at multiple layers — CM1, CM2, and CM3 — each adding another cost category. The general formula is Revenue − COGS − variable costs (fulfillment, returns, payment processing), with CM3 further subtracting customer acquisition cost (CAC).

How to calculate it

Start with revenue, then subtract COGS for CM1. For CM2, add variable operating costs such as fulfillment, returns, and payment processing fees. For CM3, subtract CAC on top of CM2 to arrive at a fully-loaded unit economics view. The result can be expressed as an absolute dollar amount per order or as a percentage of revenue.

Why it matters

Contribution margin — particularly CM3 — answers whether the business makes money on each incremental customer after accounting for the cost to acquire them. It is especially critical in ecommerce, marketplace, and hardware businesses where fulfillment and acquisition costs can erode product-level margins. A positive CM3 means the unit economics are sustainable; a negative CM3 means growth is funded by burning capital on each customer.

Benchmarks & pitfalls

Based on ATTN Agency and Northstar Finance (2026), a DTC CM3 above 20% is a common target for sustainable unit economics — note this is a directional rule of thumb, not a rigorous published study. The biggest pitfall is that CM tier definitions are not standardized: one company's CM1 may exclude costs that another's includes, making cross-company comparisons misleading unless the full cost stack is verified. Always confirm exactly which costs are included at each tier before benchmarking.