What do you
actually keep?
CM1, CM2 and CM3, per order, with returns counted properly. Most brands find the number is smaller than they thought.
Your numbers
Your blended AOV.
Landed product cost as a share of AOV.
What you pay to get one parcel delivered.
Box, filler, label and pick-pack labour.
Gateway charge as a share of order value.
Blended acquisition cost across all orders.
Share of orders that come back undelivered.
Freight both ways plus packaging.
CM3 per order
——
Estimates from the figures you entered. Treat them as a directional model of your own economics, not an audited result.
What contribution margin is
Contribution margin is what one order leaves behind after the costs that order caused. It is not profit — fixed costs like salaries, rent and software still come out of it — but it tells you whether selling one more unit helps or hurts.
CM1, CM2 and CM3
Indian D2C has settled on three layers, peeled back one at a time:
CM2 = CM1 − shipping − packaging − payment fees
CM3 = CM2 − marketing − returns drag
- CM1 tells you whether the product itself is priced sensibly.
- CM2 tells you whether you can afford to deliver it.
- CM3 tells you whether you can afford to acquire the customer who bought it. This is the number investors ask about and the one most brands quote too optimistically.
Counting returns honestly
The most common mistake in a CM3 calculation is leaving returns out, or treating them as a rounding error. If 18% of your orders come back and each one costs ₹220 in freight and packaging, that is roughly ₹40 off every single order you ship, not just the ones that fail.
That is why lowering RTO moves CM3 faster than almost anything else: it costs nothing per order, unlike raising price or cutting acquisition spend.
Where CM3 usually improves fastest
- Returns. Verify the address and score the order before dispatch. See the RTO cost calculator.
- Prepaid share. A prepaid order costs less to handle and almost never comes back.
- AOV. Most per-order costs are fixed in rupees, so a bigger basket dilutes them.
- Shipping. Courier chosen per lane rather than per rate card.
Frequently asked questions
What is a good contribution margin for D2C?
Most healthy Indian D2C brands target CM3 somewhere between 15% and 30% of AOV. Below about 10% there is rarely enough left to cover fixed costs and still grow. Above 30% usually means either strong pricing power or unusually cheap acquisition, and it is worth understanding which before you plan around it.
What is the difference between gross margin and contribution margin?
Gross margin only subtracts the cost of goods, so it is roughly CM1. Contribution margin keeps going and subtracts every other variable cost the order caused — shipping, packaging, payment fees, marketing and returns. Gross margin flatters you; contribution margin is what you can actually spend.
Should marketing spend be in contribution margin?
In CM3, yes. Acquisition is a variable cost of getting that order, so leaving it out gives you a number that looks healthy while the business loses money. Keep it out of CM1 and CM2, which are about the product and the fulfilment respectively.
How do returns affect contribution margin?
Spread the cost across every order, not just the failed ones. Multiply your RTO rate by the cost of a single failed delivery, and subtract that from every order. At an 18% RTO rate and ₹220 per failure, that is about ₹40 off each order you ship.
Why is my CM3 negative?
Usually one of three things: acquisition cost has crept above what the margin supports, the RTO rate is high enough to eat the whole margin, or AOV is too low for the fixed per-order costs of shipping and packaging. The calculator above shows which of the three is the largest slice.
Other calculators
Fix the leak,
not the spreadsheet.
Zelly Checkout scores every order before you pack it, so the numbers above start moving on their own.