Glossary · Core metricsTOFU
Contribution margin
The short answer
Contribution margin is what's left from an order after all the variable costs of fulfilling it. It's the money available to pay for acquiring the customer, cover fixed costs and produce profit.
Many D2C teams use three levels:
- CM1 — revenue minus product cost (gross margin)
- CM2 — CM1 minus shipping, packaging, payment fees and returns
- CM3 — CM2 minus marketing spend
CM3 is the number that tells you whether growth is actually making money.
Why it decides your ROAS target
Your break-even ROAS is 1 ÷ CM2 percentage. A brand with 53% CM2 breaks even at about 1.9x ROAS; a brand with 30% CM2 needs 3.3x. Two brands can report the same ROAS and be in completely different financial positions.
What eats contribution in India
- Reverse shipping on COD returns — often the largest hidden cost
- Payment gateway fees on prepaid orders
- Discounts applied to hit revenue targets
- Packaging for premium unboxing
- Marketplace commissions where you sell on Amazon or Flipkart
Contribution margin worked example
| Line | Amount |
|---|---|
| Net selling price (excl. GST) | ₹1,000 |
| Product cost | −₹350 |
| Shipping and packaging | −₹90 |
| Payment/COD fees | −₹30 |
| Returns provision | −₹50 |
| Contribution margin | ₹480 (48%) |
| Break-even ROAS | 1 ÷ 0.48 ≈ 2.08x |
Contribution margin in practice
An order worth ₹1,500 has ₹600 product cost, ₹90 shipping, ₹40 payment fees and ₹70 expected returns cost: contribution margin is ₹700, or about 47%. That number — not gross margin — sets break-even ROAS.
Why it matters
- It sets break-even ROAS and target CAC
- It shows which products deserve ad budget
- It reveals the true cost of discounts
Contribution margin in Indian eCommerce
Marketplace commissions, COD fees, return-to-origin costs and festive discounts often take a bigger share of revenue than founders expect. Calculating contribution margin per channel shows which channels are actually profitable.
Frequently asked questions
What's a healthy contribution margin?
It depends on your fixed costs and growth stage. You need enough CM3 to cover overheads — or a clear plan for repeat purchases to get there.
Should contribution margin include ad spend?
CM3 does. Track CM2 to set targets and CM3 to judge results.
Is contribution margin the same as gross margin?
No. Gross margin usually deducts only product cost; contribution margin also deducts other variable costs per order.
How do we improve contribution margin?
Better pricing, higher AOV, lower shipping and payment costs, fewer returns and fewer discounts.
Should marketing spend be included?
Contribution margin before marketing sets targets; after marketing shows profit.
Should contribution margin be calculated per channel?
Yes — marketplaces, D2C and quick commerce often have very different cost structures.
Related terms
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