⚡ Tier 2 - ImportantID: contributionMargin
Contribution Margin
Revenue minus variable costs per unit
In Simple Words (Zero Jargon):
Revenue minus variable costs per unit
Official Mathematical Equation
Revenue − Variable Costs (COGS + Fulfilment + Payment Processing + Returns)
Why It Is Critical
Contribution margin goes one step further than gross margin by subtracting all variable costs, not just cost of goods. It represents how much each sale actually contributes to covering fixed costs and generating profit. It is a more honest foundation for setting CAC targets than gross margin alone.
Strategic Rules of Thumb & Execution Playbook
- Use contribution margin (not gross margin) for the most accurate CAC ceiling calculation.
- If your contribution margin is thin, your CAC ceiling will be low - which means scaling aggressively on paid channels will be very difficult to justify.
What You Get: A more complete profitability picture per sale than gross margin - the right foundation for calculating how much you can afford to spend on customer acquisition.