What is Contribution margin (CM1, CM2, CM3)?

Start from net revenue

Net revenue is what customers paid, minus GST (which is not your income), discounts, and cancelled or returned orders. Every layer of contribution margin starts here, not from GMV.

The three layers

• CM1 = net revenue − product cost. The cost of the goods sold, including inward freight and stock lost on damaged returns. CM1 tells you whether the product itself is priced well.
• CM2 = CM1 − the cost of getting orders to customers. Packaging, marketplace commission and fees, payment-gateway fees, shipping, and the cost of RTO orders. CM2 shows whether an order still makes money once it has been delivered.
• CM3 = CM2 − marketing. Ad spend and other marketing that grows with sales, such as influencer and affiliate costs. CM3 is what each order contributes towards fixed costs like salaries, rent and software.

Why the layers matter

A brand can have a healthy CM1 and still lose money on every order if returns, fees or ads cost too much. Each layer points to a different fix:

• Low CM1 — look at pricing, discounts and product cost.
• Big drop from CM1 to CM2 — look at fulfilment, marketplace fees and RTOs.
• Big drop from CM2 to CM3 — look at ad spend and ROAS.

CM2 also sets your break-even ROAS. If CM2 is one-third of net revenue, ads must bring in at least ₹3 of net revenue for every ₹1 spent, or CM3 turns negative.

Per order and per channel

Work out contribution margin per order and for each channel — your website, each marketplace, quick commerce — because fees, returns and marketing differ a lot between them. Businesses draw the lines slightly differently (for example, where payment-gateway fees sit), so always state which costs each layer includes.