Contribution Margin III for Assortment Decisions
CM3 shows which products truly carry your e-commerce business - and which burden it.
Contribution Margin III (CM3) goes beyond pure transaction costs. It considers product-specific fixed costs - costs that can be directly attributed to a product but don't vary with each individual order. Only here does the true profitability of a product become apparent.
What are Product-specific Fixed Costs?
In e-commerce, various costs arise that are fixed but can be attributed to individual products or product groups:
- 1 Allocated storage costs: Storage space rent per item, capital carrying costs, insurance. A large TV ties up more capital and space than a t-shirt.
- 2 Product-specific marketing: Google Shopping campaigns for specific products, Instagram ads for categories, influencer partnerships.
- 3 Product maintenance: Effort for product descriptions, photos, content creation per item.
- 4 Category management: Allocated costs for buyers, category managers, or product managers.
Slow movers are often CM3 killers: A product sitting in the warehouse for 6 months incurs significant capital carrying and storage costs. Calculate these in!
CM3 Calculation Example: Fashion vs. Electronics
Let's compare two products with the same CM2:
Sneakers ($99 SP, CM2: $40):
- Google Shopping costs: $6/sale
- Allocated storage costs (20 days): $1.20
- Content creation allocated: $0.60
-> CM3 = $32.20 (33%)
Bluetooth Headphones ($99 SP, CM2: $40):
- Google Shopping costs: $9/sale (higher CPCs)
- Allocated storage costs (45 days): $2.40
- Content creation allocated: $1.20
-> CM3 = $27.40 (28%)
Although both products have the same CM2, the sneakers are significantly more profitable due to lower marketing and storage costs.
Assortment Decisions with CM3
CM3 enables well-founded assortment decisions:
- 1 Stars: High CM3 + high volume -> Increase marketing, build inventory.
- 2 Cash cows: High CM3 + moderate volume -> Maintain efficiency, don't over-invest.
- 3 Question marks: Low CM3 + growth potential -> Optimize marketing efficiency.
- 4 Dogs: Negative CM3 + low volume -> Consider delisting, start clearance sale.
Combine CM3 with AOV and Product Margin for a complete picture of your assortment performance.