Calculate Your TRUE Contribution Margin for Ecommerce Growth
Contribution Margin per Order is the core ecommerce KPI to inform our customer acquisition spending . Unfortunately, most don't calculate it correctly, resulting in excessive CAC and dimished profits.
What’s Contribution Margin per Order?
Simple. How much money’s left after all the variable costs to make and deliver the order and the marketing costs needed to generate the order.
Using the contribution margin to steer our business and growth requires splitting it by new customer acquisition VS customer retention.
This simple split allows us to recognize our core growth model and unlocks continued growth even after our new customer acquisition has become unprofitable. But that’s already a topic for another day.
Calculate Your True Acquisition Contribution Margin per Order with a Simple Free Google Sheet
Understand how to properly calculate your TRUE contribution margin per order and calculate it for yourself using my simple free Google calculation sheet.
To use simply make a copy of the sheet to your Google Drive.
Please share, like and comment on LinkedIn to help more people get the sheet. Also post any questions or feedback regarding the sheet there.
What Goes into Your True Acquisition Contribution Margin?
#1 Single Unit (SKU) COGS
How much the product costs you, all-in. That’s your product purchase cost, customs duties per item, freight to your warehouse, average cost of warehousing the product and any additional costs like local labels, label translations, local instruction manual etc.
Businesses will often also discount an item by default, so if that’s you, you better make sure you include that in your math.
#2 Basket Composition & Costs
When doing unit economics calculations businesses will often apply pick & pack costs, shipping costs, payment costs and other variable costs to an individual product.
But, you rarely sell just a single product or a single item. Enter basket economics.
Each basket comprises of the cost side and the revenue side:
The cost side: COGS of products it contains, shipping costs, parcel packaging material, pick & pack costs, any payment fees, and even the average cost of customer support
The revenue side: the discounted retail prices of the products in the basket, shipping revenues, any other surcharges, all decreased for any basket-level discounts (like welcome coupon)
But to get to TRUE average basket value and TRUE Cost of Sales (COS) we also need to calculate with the following in mind:
How rejections, cancellations and returns decrease our average basket size (well, they won’t decrease it per say, but we need to calculate the average virtual decrease if we want to calculate our TRUE contribution margin and understand how much we can spend on acquisition)
How rejections, cancellations and returns increase our average cost of sales, because someone also needs to pay for return shipping etc. And that someone is usually us.
To help you do this we built two models:
The “calculated AOV” model ==> start with the average value of products in the basket and built from there.
The “from online AOV” model ==> start with your current online AOV and build from there.
Regardless of which model you use the core inputs are the same, just the starting point differs.
#3 Contribution Margin per Order
The big one.
When calculating contribution margin per order make sure you select the right inputs:
Select source of data: select whether you’re using the inputs from “calculated AOV” (columns D-F) or “from online AOV” (columns H-J)
Marketing cost base: do you want the model to calculate from your “online AOV” (meaning the one you either see in GA4 or Shopify) or your “true AOV” (our calculation with decreased value for rejections, cancellations and returns); it’s just a question of what your marketing costs are calculated from
Marketing costs model: do you want to calculate acquisition costs using CPO%, ROAS or CAC $. You only need to enter the KPI you select in the fields below.
And the rest is magic :)
The final output is the TRUE Contribution Margin per Order, meaning how much money is really left after ALL the variable costs, and a visual representation of your basket economics.
How to Use This Data?
Every cost item is an optimization opportunity. Understand your full cost structure and then make an action plan to optimize step-by-step.
Understand how much you’re actually making with each acquisition order to fine-tune your acquisition spend (increase or decrease).