Ask a founder what an order is worth and you’ll usually hear the average order value. Ask finance and you’ll hear gross margin. Both are wrong for running growth, because both leave out the costs that move when marketing moves.

Contribution margin is what one order leaves after every cost that exists only because the order happened. It’s built in three layers, and the names vary by company. These are the ones I use.

CM2 is the number growth should run on. It’s what an order can afford to spend on acquiring the next one. Gross margin stops at CM1 and ignores shipping and returns, which in apparel and heavy goods can be the difference between a profitable order and a loss.

Gross margin tells you the product is fine. CM2 tells you the order is.

Walk one order through

Picture an $80 basket. The customer used a 15% code, so they paid $68, plus $5 shipping you charged: $73 in. The product cost $22. Picking, packing and packaging cost $5.50, the carrier charged $9, and the card processor took 3%, about $2.19. One in ten orders like this comes back for a refund, and half of what comes back can be resold.

Take the refunds out first. On average this order brings in $65.70, and the product it really costs you, after resold returns go back on the shelf, is $20.90. CM1 is $44.80, which looks healthy. CM2 subtracts $5.50, $9 and $2.19, leaving about $28.11, or 43% of net revenue. If you spent $35 on ads to win this order, CM3 is about −$6.89. The order lost money, and the ad platform reported a return on ad spend of 2.1.

Now look at where each marketing decision lands. The 15% code cost $12 of revenue and about $10.44 of CM2, more than the carrier. Free shipping would cost about another $4.35. A looser return policy moves the returns line. A bundle that raises the basket to $110 probably adds more CM2 than any code takes away, because pick, pack and payment don’t scale with the price.

Four places CM2 hides

• Returns. Refunds show up weeks after the order, in a different report. Price them into the order at your trailing return rate by category.
• Shipping you don’t charge. “Free shipping over $X” is a discount paid to the carrier. Count it.
• Codes that stack. A welcome code, an influencer code and a sitewide sale on the same order is common. Look at average discount per order, not the advertised rate.
• Mix. The average hides the products that lose money. Run CM2 by first product, because that’s what paid media is buying.

Do this

• Get CM2 for your top five first products from finance, not from memory. Put it beside each product’s ROAS in the ad account. If the rankings differ, the ad account is optimizing for the wrong thing.