Glossary - Margin and unit economics
CM3 (contribution margin 3)
CM3, or contribution margin 3, is the third rung of the contribution margin step-down: CM2 minus variable marketing, meaning ad spend, affiliate commission and other acquisition costs that rise and fall with orders. It is the margin an order actually contributes toward fixed costs and profit, and the rung that tells an ecommerce operator whether growth is paying for itself.
| Variable | Definition |
|---|---|
| CM2 | Net revenue minus landed COGS, fulfilment, outbound shipping and payment fees. |
| Variable marketing | Marketing that scales with orders: paid media, affiliate and influencer commission, and per-send email or SMS cost. Allocated to orders, customers or periods consistently. |
What stays out matters as much as what goes in. Salaries, agency retainers and software do not move with the next order, so they are fixed costs and sit below CM3, on the way to net margin. Discounts are not marketing here either: they come off revenue at the top, before CM1 is computed. The full step-down is worked on CM1, CM2 and CM3.
Worked example
Same A$120 basket, same product, same warehouse, and CM3 nearly doubles when the order arrives without paid acquisition. That is why store-wide CM3 is a blend of two very different businesses: new customers bought at full ad cost, and returning customers who cost little to bring back. A brand whose CM3 improves as its repeat purchase rate climbs is healthy; one whose CM3 only holds up because repeat revenue is masking loss-making first orders needs to know that before it scales spend.
What is a good CM3?
There is no universal target, because CM3 sums every decision above it: category, landed cost, basket size, fulfilment and acquisition efficiency. For spread rather than a target, Finaloop's aggregated dataset of hundreds of 7 to 8 figure US brands (2023 to 2025) put median brand contribution margin near 25%, with a quartile spread of 3% to 56%, as quoted in our contribution margin entry. Same revenue, very different keep.
The practical test is coverage: CM3 dollars across the month must exceed fixed costs, or the business loses money however fast revenue grows. That is the break-even point expressed in margin terms, and it is the reason revenue can rise while profit does not.
CM3 vs related metrics
| Metric | What it measures | How it differs |
|---|---|---|
| CM2 | Margin after product and delivery costs | The pool marketing spends from; CM3 is what is left after it has spent. |
| POAS | Profit per dollar of ad spend | A ratio on the ad account; CM3 is the dollar margin on the order or customer. |
| Net margin | Profit after every cost, fixed included | CM3 stops before rent, salaries and software; net margin takes them out. |
| Margin LTV | A customer's lifetime value in margin | The sum of CM2 or CM3 across all of a customer's orders, rather than one order. |
Common mistakes
- Putting fixed marketing costs into CM3. A retainer or a salaried content team does not change with the next order. Loading it into CM3 makes every order look worse and blurs the scaling decision.
- Using platform-reported conversions to allocate ad cost. Platforms over-claim, so orders credited to ads get too little cost each and CM3 flatters paid channels. Allocate from your own order data. See who gets the credit.
- Reading only the blended CM3. New and returning orders carry very different marketing loads. Split them, or a healthy repeat base will hide first orders that lose money.
- Judging a first order on CM3 alone. A negative first-order CM3 can be a sound bet if repeat margin repays it inside your CAC payback window. Measure the payback; do not assume it.
- Counting discounts as marketing. Discounts reduce revenue at the top of the step-down. Putting them in CM3 double counts or hides them.
FAQ
CM3 is the contribution margin left after landed COGS, fulfilment, shipping, payment fees and variable marketing. It is what each order or customer contributes toward fixed costs and profit, and the rung that shows whether paid growth pays for itself.
CM3 removes only costs that move with orders. Net profit also removes fixed costs such as rent, salaries, software and retainers. A business can have a positive CM3 and still make a loss if total CM3 dollars do not cover the fixed cost base.
Both. Per order shows whether a campaign or product pays its way today. Per customer, summed across all their orders, shows whether acquisition cost is repaid over the relationship. The second is the basis of margin LTV and CAC payback.
Yes. When marketing cost per order is larger than CM2, CM3 goes below zero and each extra order loses money. That is often acceptable on a first order for a product with proven repeat purchase, but only when the payback is measured, not hoped for.
Updated September 2026