Unit economics
Contribution margin
What is left of a sale after every cost that exists only because the sale happened.
Formula
Contribution margin = Revenue − Variable costs; as a rate, ÷ Revenue
- Variable costs
- cost of goods, payment fees, delivery, per-order support, returns
Gross margin subtracts only cost of goods. Contribution margin subtracts everything that scales with the order, which is why it is the honest input to a marketing decision and gross margin is not.
Contribution margin is what pays for the fixed base — the team, the rent, the software — and everything after that is profit. It is the correct ceiling on acquisition spend: a business cannot pay more to acquire a customer than the customer contributes, however good the revenue looks.
It is also where most e-commerce businesses discover their real problem. Payment fees, delivery, returns and per-order support routinely remove ten to fifteen points that never appear in the gross-margin figure the company plans against.
A store with 45 % gross margin and 32 % contribution margin sets its target CAC on the 45 and buys every customer at a thirteen-point loss it will not see until the quarter closes. Returns and delivery are the usual missing pieces.
Quantities derived from the counts. Each is only as sound as the definitions beneath it.
Cannot be computed without
- AOV
- Revenue divided by the number of orders that produced it — the simplest lever on unit economics and the most volatile.
Is an input to
- Unit economics
- What one unit of the business earns and costs, measured so that the answer to “should we sell more of this” is arithmetic rather than opinion.
- LTV
- The contribution a customer produces across their whole relationship with the business, discounted for the fact that it arrives later.
- CAC payback period
- How many months of a customer's contribution it takes to earn back what they cost to acquire.
An error in this figure does not stay in it. It reaches four numbers above it, and each of those is quoted as though it were measured.
A definition is free. Being answerable for the figure it produces is the part that is bought, and this term is a working part of the engagements below.
- Strategy and market research
- State the assumption that would change the answer, then go and test that.
- From idea to a product that exists
- Find the assumption that kills it, and test that one first.
- Digital marketing for Dubai and the UAE
- Spend follows contribution margin, not volume.
The definitions are the easy part. Whether the figure on your dashboard was computed this way is a different question, and usually the more expensive one.