The ecommerce unit economics stack: CM1, CM2, CM3 explained
Most ecom brands know their revenue. Fewer know their real margin. The CM1 → CM2 → CM3 waterfall shows you where profit actually lives — and where it leaks.
Jakob Sperber
Director
Bussines
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Every ecommerce brand knows its revenue. Most know their gross margin — roughly. But ask a founder what their CM3 is, and you'll usually get a blank stare.
That's a problem. Because revenue doesn't pay bills. Contribution margin does. And the gap between what founders think they make per order and what they actually make per order is where most scaling problems hide.
This post breaks down the contribution margin stack — CM1 through CM3 — and explains why it should drive every decision you make about pricing, ad spend, and growth.
What are unit economics?
Unit economics is the profit and loss of a single transaction. Not your monthly P&L — one order. One customer. One unit of business.
It answers: when I sell one product to one customer through one channel, how much money do I actually keep?
If the answer is negative or razor-thin, scaling just means losing money faster. If the answer is healthy, you've got a business that can fund its own growth.
The contribution margin waterfall
Think of contribution margin as a waterfall. Revenue enters at the top, and costs strip it away at each level. What survives at each stage tells you something specific about your business.
CM1: Product margin
CM1 = Revenue − Cost of Goods Sold (COGS)
This is your product margin. Revenue minus what it costs to make or buy the product — raw materials, manufacturing, landed cost, packaging.
CM1 tells you whether your product is priced correctly relative to what it costs to produce. If CM1 is below 60–70% for a DTC brand, you're going to struggle to run profitable paid acquisition at scale.
Example: You sell a product for $80. COGS is $22. CM1 = $58 (72.5%).
CM2: Margin after variable costs
CM2 = CM1 − Variable Costs
Variable costs are everything that scales with each order: shipping, payment processing (Stripe/Shopify Payments takes ~2.9% + 30c), pick and pack fees, transaction fees, and platform costs tied to volume.
CM2 is the real margin per order before marketing. This is the number that determines how much you can afford to spend acquiring a customer.
Example: CM1 is $58. Shipping costs $8. Payment processing is $2.62. Pick & pack is $4. CM2 = $43.38 (54.2%).
CM3: Margin after marketing
CM3 = CM2 − Customer Acquisition Cost (CAC)
CM3 is what's left after you've paid to acquire the customer. This is your true per-order profit from a new customer — the number that tells you whether your growth engine is sustainable or a cash incinerator.
Example: CM2 is $43.38. Your new customer CAC is $35. CM3 = $8.38 (10.5%).
That $8.38 is what's left to cover fixed costs — rent, software, salaries, everything that doesn't scale per order. If CM3 is negative, you're subsidising growth out of your existing cash reserves.
Why most brands only know CM1
Shopify shows you revenue minus COGS if you've set it up correctly. That's CM1. Most founders look at this number, see 70% margin, and think they've got plenty of room to spend on ads.
But by the time you subtract variable fulfilment costs and a realistic CAC, that 70% can easily become 8–12%. And if you're calculating CAC wrong — using blended CAC instead of new customer CAC — even that 8% might be fiction.
The brands that scale profitably know all three numbers cold. They know exactly how much they can pay for a customer, because they know exactly how much they keep from each sale.
How the CM stack drives every other decision
Ad budgets
Your maximum allowable CAC = CM2. Spend more than CM2 acquiring a customer and you lose money on that order, full stop. Your target CAC should be well below CM2 to leave room for CM3 to cover fixed costs and generate actual profit.
Pricing
If CM2 is too thin to support profitable acquisition, you don't have a marketing problem — you have a pricing problem. Raising price by $10 flows directly to CM1, CM2, and CM3 dollar-for-dollar.
Channel decisions
Different channels have different CACs. If Google Shopping delivers a $28 CAC and Meta prospecting delivers a $45 CAC, and your CM2 is $43 — Meta prospecting is underwater. The CM stack tells you where to allocate budget.
Retention investment
A returning customer has a CAC of ~$0 (or close to it, via email/SMS costs). Their CM3 ≈ CM2. This is why retention is so powerful — it effectively resets the waterfall. Every repeat purchase prints margin at the CM2 level.
Building your own CM waterfall
Here's how to calculate yours:
Pull your true COGS per product. Not the average — the actual landed cost per SKU including freight and packaging.
Calculate variable costs per order. Shipping, payment processing, pick & pack, platform fees. Use averages from the last 90 days.
Calculate your new customer CAC. Not blended — separate new customer spend from total spend. We explain how in our post on blended CAC vs new customer CAC.
Run the waterfall. Revenue → minus COGS = CM1 → minus variable costs = CM2 → minus CAC = CM3.
Do it per channel and per product. Averages hide problems. Your best product through your best channel might be printing money while your worst combination bleeds cash.
The bottom line
Unit economics isn't an accounting exercise. It's the operating system for every growth decision your brand makes. If you don't know your CM2, you don't know what you can afford to pay for a customer. If you don't know your CM3, you don't know if you're actually making money.
Start with the waterfall. Every other metric — ROAS, MER, LTV, CAC payback — only makes sense when you know what margin it's measured against.
