Contribution Margin II - The Most Important E-Commerce Metric
CM2 shows the true profitability per order - only here does it become clear what's actually earned.
Contribution Margin II (CM2) is the decisive metric for online retailers. While CM1 only considers COGS, CM2 includes all variable costs incurred with each order. Only here does it become apparent whether an order is truly profitable.
Variable Distribution Costs in E-Commerce
In online retail, there are typical variable costs incurred with every order:
- 1 Shipping costs: UPS, FedEx, USPS - the cost per package. Significantly higher for oversized items or express delivery.
- 2 Packaging costs: Boxes, filler material, tape, inserts. Often underestimated but adds up quickly.
- 3 Payment fees: PayPal (2.9% + $0.30), Stripe (2.9% + $0.30), Credit card (1.5-2.5%). Differences are substantial.
- 4 Return processing: Return shipping, quality inspection, restocking. In fashion, the biggest cost factor.
With a 40% return rate in fashion, return costs can amount to $10-15 per sold item - include these proportionally in your CM2!
CM2 Calculation Example for an Online Store
An example from a fashion store: You sell a dress for $99.
- 1 Purchase price: $39 -> CM1 = $60
- 2 Shipping: $5.50
- 3 Packaging: $2.00
- 4 PayPal fee (2.9% + $0.30): $3.17
- 5 Proportional return costs (40% rate, $18 per return): $7.20
CM2 = $60 - $5.50 - $2.00 - $3.17 - $7.20 = $42.13. That's 43% of the selling price - a solid value for fashion.
Levers for CM2 Optimization
Variable distribution costs offer concrete optimization potential:
- 1 Shipping: Negotiate framework agreements, use multi-carrier strategy, optimize package sizes.
- 2 Packaging: Use standard boxes, reduce filler material, evaluate sustainable alternatives.
- 3 Payment: Promote cheaper payment methods, optimize provider mix, negotiate rates.
- 4 Returns: Improve product descriptions, implement size guides, analyze return reasons.
CM2 forms the basis for Contribution Margin III, which additionally considers product-specific fixed costs.