Unit economics
6 min read · Updated 1 Oct 2026
Contribution margin per order: a working definition
Gross margin hides most of the costs that decide whether an order made money. Here is a layered definition you can compute from your own exports.
Gross margin (selling price minus product cost) is the number most brands quote, and it is the least useful one for deciding what to spend on acquisition. An order also pays for packaging, shipping, payment fees, returns and the ads that brought the customer in. Contribution margin layers those costs in, in the order you control them.
The three layers
| Layer | Starts from | Subtract |
|---|---|---|
| CM1 | Net revenue (after discounts, excluding GST) | Landed product cost (COGS) |
| CM2 | CM1 | Packaging, pick-and-pack, forward shipping, payment gateway fees, marketplace commission, expected return/RTO cost |
| CM3 | CM2 | Performance marketing spend attributed to the order |
CM3 is the figure that tells you whether a channel is profitable on the first order. If CM3 is negative, the order only makes sense if you have evidence of repeat purchases that cover the gap.
A worked example
Illustrative numbers only: replace every input with your own.
| Line | Amount (₹) |
|---|---|
| Selling price incl. 18% GST | 1,180 |
| Net revenue (excl. GST) | 1,000 |
| COGS | −300 |
| CM1 | 700 |
| Packaging + pick-and-pack | −40 |
| Forward shipping | −70 |
| Payment gateway fee (2% of 1,180, plus GST on the fee) | −28 |
| Expected RTO/return cost | −45 |
| CM2 | 517 |
| Ad spend per order (spend ÷ orders) | −400 |
| CM3 | 117 |
Common mistakes
- Using revenue including GST. GST is collected on behalf of the government, so it is not revenue.
- Leaving out the GST charged on gateway and marketplace fees when you can't claim it back as input credit.
- Treating RTO as a percentage of revenue. It is a cost per failed parcel, so model it as probability × cost of a failed delivery.
- Using platform-reported ROAS for the marketing line. Divide actual spend by actual orders for the same period.
Compute CM2 per SKU and per channel before you set a target CAC. The highest acceptable CAC for a first order is roughly your CM2: spend above it only if you can see repeat revenue in your cohort data.