Glossary
Contribution margin
What sales leave after the costs that grow with them: goods, then fulfilment and fees, then marketing. Often split into CM1, CM2 and CM3.
Formula
CM1 = net sales minus cost of goods. CM2 = CM1 minus shipping, fulfilment and payment fees. CM3 = CM2 minus marketing.
Worked example
A month with £100,000 of net sales, £40,000 of cost of goods, £15,000 of shipping and fees and £25,000 of ad spend gives CM1 £60,000, CM2 £45,000 and CM3 £20,000.
In fashion, footwear and sportswear
Take returns off before you start. Returns are a large share of gross sales in fashion, so a margin built on gross sales flatters every line that comes back.
Where it misleads
Count cost of goods net of returns, so goods that came back and sold again are not charged twice. Fixed costs such as salaries and rent sit below CM3, not in it.