The Ceiling on What You Can Spend (Contribution Margin)

Why this matters

Contribution margin is the revenue left over after variable costs — the pool of money that must cover fixed costs and profit. In paid acquisition, contribution margin per customer (or per order) is the ceiling on what you can profitably spend to acquire them. Operators who optimise for revenue or ROAS without tracking contribution margin regularly discover they are scaling a business that loses more money per customer as it grows.

Demo

Contribution Margin = Revenue − Variable Costs. Variable costs in e-commerce typically include COGS, payment processing (2–3%), shipping, and returns. Fixed costs (rent, salaries, software) are excluded.

Try it yourself

1. Increase the return allowance from 8% to 20% (typical for fashion) and observe how CM% drops — find the return rate at which CM turns negative.
2. Add a subscription_discount = 0.10 for subscribers paying 10% less, recompute CM for subscribers vs. one-time buyers, and note which cohort you can afford a higher CAC for.
3. Calculate the maximum CAC that still achieves a 3:1 LTV:CAC assuming an 18-month average customer lifetime at the CM per order you computed.
4. Look up the contribution margin percentages disclosed by three public DTC or e-commerce companies and compare them to your model.

References

• https://www.profitwell.com/recur/all/contribution-margin
• https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/the-performance-race-in-e-commerce