Contribution margin measures how much revenue remains after deducting variable costs. In the context of Amazon and retail media for CPG brands, it's the most important profitability metric — more useful than ACoS or ROAS alone because it captures the full picture of whether your sales are actually making money.
The contribution margin framework uses three levels — CM1, CM2, and CM3 — that progressively account for more costs. This layered approach reveals exactly where profitability breaks down, so you know whether to fix your product costs, advertising efficiency, or operational overhead.
The CM1 / CM2 / CM3 Framework
| Level | Calculation | What It Tells You |
|---|---|---|
| CM1 (Gross Margin) | Revenue − COGS − Platform Fees | Is the product fundamentally profitable before marketing? |
| CM2 (After Advertising) | CM1 − Total Ad Spend | Is the product profitable after advertising costs? |
| CM3 (After All Variable Costs) | CM2 − Logistics − Returns − Chargebacks − Other Variable Costs | Is the product truly profitable on a per-unit basis? |
Why Contribution Margin Matters More Than ACoS
Most Amazon advertising conversations focus on ACoS (Advertising Cost of Sale) — the ratio of ad spend to ad revenue. The problem: ACoS ignores product margins entirely.
Consider two products:
- Product A: 25% ACoS, 30% gross margin → CM2 = 5% (barely profitable)
- Product B: 35% ACoS, 65% gross margin → CM2 = 30% (highly profitable)
If you optimize for ACoS, you'd scale Product A and cut Product B. If you optimize for contribution margin, you'd do the opposite. This is why ACoS-driven decisions often destroy profitability for CPG brands — a "good" ACoS on a low-margin product is still a money loser.
How to Use CM1/CM2/CM3 for Decisions
CM1 is negative → Fix the product economics
If CM1 is negative, no amount of advertising optimization will make the product profitable. You need to renegotiate COGS, raise prices, or reduce platform fees (e.g., switch from FBA to FBM for heavy items).
CM1 positive, CM2 negative → Fix advertising efficiency
The product is fundamentally viable, but ad spend is eating the margin. Options: improve keyword targeting, reduce wasted spend on non-converting queries, shift budget to campaigns with proven TACoS improvement.
CM2 positive, CM3 negative → Fix operations
Advertising is efficient, but logistics, returns, or chargebacks are eroding profitability. Common CPG culprit: high return rates due to damaged packaging on Amazon FBA.
CM3 positive → Scale
The product is truly profitable. Increase ad spend as long as CM3 stays positive. Track the CM3 trend as you scale — it often compresses as you push into less efficient keywords.
Example: CM Framework Revealing a Hidden Loser
A CPG brand selling health supplements on Amazon had a top-selling product with 22% ACoS — their team considered it a winner. When they built the CM waterfall: CM1 was 45% (healthy gross margin after COGS and Amazon fees). But CM2 dropped to 23% after advertising. And CM3, after accounting for returns (8% rate on this product), FBA storage fees, and promotional discounts, landed at 6%. A 6% contribution margin left almost no room for error. Meanwhile, their second-best product had a "worse" 32% ACoS but 72% gross margin, yielding a CM3 of 18%. The "loser" ACoS product was three times more profitable. They reallocated ad budget: scaled the high-margin product aggressively and reduced the low-margin product to maintenance spend. Total portfolio CM3 improved from 9% to 14% within a quarter. Amazon's advertising business generated $56.2 billion in 2024 (Amazon Q4 2024 earnings), and too many brands feed that machine without knowing which products actually make money after all costs.
Frequently Asked Questions
What's a good CM2 for CPG on Amazon?
For CPG brands on Amazon, a healthy CM2 (after advertising) typically ranges from 10-20%. Below 10% leaves little room for error. Above 20% usually means you're under-investing in advertising and leaving market share on the table.
How do I calculate contribution margin if I sell through Amazon Vendor Central?
For Vendor Central (1P), COGS includes the wholesale price you sell to Amazon at, not the retail price. CM1 = Amazon's purchase price − your manufacturing/shipping cost. The rest follows the same framework, with Amazon's co-op fees and trade terms factored into CM1.
Should I use contribution margin for all products or just top sellers?
Start with your top 20% of products by revenue — they typically drive 80% of your profit or loss. Once you have the CM framework in place for those, expand to the long tail. Many brands discover they have a "CM3-negative tail" of products that look busy but lose money.