Contribution Margin - What is it?

I see quite a bit of online debate around how to define “Contribution Margin” in the DTC space.

The most common debate is whether you include ad spend in your contribution margin calculation.

Personally, I love the way that our tech partner Klar breaks it down. It’s the standard we use for all our DTC brands.

Klar breaks down Contribution Margin in three ways.

• CM1
• CM2
• CM3

→ Contribution Margin 1 = Net Sales - Cost of Goods Sold

This is the first pass, telling you how much money you have left after a sale to cover marketing, payment, & delivery costs.

→ Contribution Margin 2 = Contribution Margin 1 - Logistics Costs - Transaction Fees

This is a common way people report Contribution Margin.

This tells you how much money you made from the sale after all of the costs of fulfillment have been paid off.

This number determines how much you have left over to cover your marketing & OpEx.

→ Contribution Margin 3 = Contribution Margin 2 - Ad Spend

CM3 tells you the amount of profit you have left over to pay off your OpEx / fixed costs.

The closest analog your advertiser has to profit for your paid acquisition.

It’s crucial to understand this if you are a DTC founder.

It’s a direct barometer for how well your paid acquisition is performing.

This is the metric that your paid media agency is, ideally, optimizing for (but few do).

So, out with the debate in my opinion.

Look at all three steps of your paid program's measurement with CM1/CM2/CM3.

Most of the European brands we work with are operating off this model, but North American brands would benefit from setting this standard.

Curious about your own brand’s CM1/2/3? Send me a DM if you have any questions.