Glossary - Margin and unit economics
CM2 (contribution margin 2)
CM2, or contribution margin 2, is the second rung of the contribution margin step-down: CM1 minus the cost of getting the order to the customer and getting paid for it, meaning pick-pack, packaging, outbound shipping and payment fees. It answers the operations question for an ecommerce brand: once the order has shipped, how much margin is left to spend on winning it?
| Variable | Definition |
|---|---|
| CM1 | Net revenue minus landed COGS (unit cost plus freight-in plus duty). |
| Fulfilment | Pick-pack labour or 3PL fees per order, plus packaging and inserts. |
| Outbound shipping | What you pay the carrier to deliver the order, net of any shipping the customer paid. Free shipping lands here in full. |
| Payment fees | Card, wallet and buy-now-pay-later fees charged on the transaction. |
Conventions differ. Some operators put returns handling or warehousing into CM2, and some number the rungs differently. Our canonical step-down, taught on CM1, CM2 and CM3, stops CM2 at fulfilment, shipping and payment fees, then removes variable marketing at CM3. State your convention before comparing numbers.
Worked example
This is the same A$120 order used across The Math. The order looked 58% profitable at CM1 and has 45% left once it is packed, delivered and paid for. That 45% is the whole pool marketing can spend from, which is why break-even ROAS is 1 ÷ CM2 %, not 1 ÷ gross margin. At 58% the break-even would read 1.72, and every campaign between 1.72 and 2.22 would look profitable while losing money.
Now drop the order to A$60 with the same A$11.00 shipping and pick-pack. Fulfilment is close to a fixed cost per order, so it eats almost twice the share of a half-size basket. That is the arithmetic behind free-shipping thresholds, and the free shipping threshold calculator works it on your own numbers.
What is a good CM2?
There is no honest universal target. CM2 depends on product weight and size, your carrier rates, your average order value against a per-order fulfilment cost, the share of orders you ship free and your payment mix. A heavy, low-AOV product can run a strong CM1 and a thin CM2; a light, high-AOV product loses little between the two rungs.
The useful test is headroom. CM2 has to fund acquisition and still leave contribution at CM3. If your blended cost of marketing per order is close to CM2, every order is roughly break-even before a dollar of rent or salary is paid. Work your own step-down with the free contribution margin calculator.
CM2 vs related metrics
| Metric | What comes out of revenue | How it differs |
|---|---|---|
| CM1 | Landed COGS only | The product question: can the item carry its own cost? CM2 starts where CM1 ends. |
| CM3 | Everything in CM2 plus variable marketing | The acquisition question: did the order still contribute after the ad that won it? |
| Gross margin | COGS as booked in the P&L | Usually sits above CM2 because shipping and fees are booked lower down, often as operating expenses. |
| Break-even ROAS | Not a margin, a ratio | Derived from CM2: 1 ÷ CM2 % is the ROAS at which an order exactly pays for its ad. |
Common mistakes
- Using the shipping the customer paid instead of what you paid. CM2 subtracts the carrier cost net of shipping revenue. A free-shipping order carries the full cost; a paid-shipping order may carry almost none.
- Forgetting payment fees because they are small. A few percent per order, on every order, is the difference between a campaign that clears break-even and one that does not.
- Averaging fulfilment across the whole store. Pick-pack and postage are near fixed per order, so small baskets and bulky SKUs carry far more of them. Compute CM2 per SKU and per order size.
- Setting ROAS targets from gross margin. The ad spends from the CM2 pool, so a target built on gross margin is set too low and approves losing spend.
- Leaving returns out entirely. Whether return shipping sits in CM2 or in a separate line, it moves with the order. See what returns really cost.
FAQ
CM2 is contribution margin after product cost and the cost of delivering and collecting on the order: net revenue minus landed COGS, fulfilment, outbound shipping and payment fees. It is the margin left to fund marketing, and the figure break-even ROAS is built on.
Three rungs, three decisions. CM1 removes landed COGS and judges the product. CM2 also removes fulfilment, shipping and payment fees and judges operations. CM3 also removes variable marketing and judges acquisition. Each rung is a smaller number and a narrower question.
Start from net revenue after discounts and refunds, subtract landed COGS to get CM1, then subtract pick-pack, packaging, outbound shipping net of shipping revenue, and payment fees. Divide by net revenue for CM2 %. An A$120 order with A$54 left runs at 45%.
Because the ad dollar is paid out of what the order leaves after product and delivery costs. At a 45% CM2, each dollar of revenue funds 45 cents of marketing, so ROAS must reach 1 ÷ 0.45, or 2.22, before the order stops losing money.
Updated September 2026