In This Guide
Your Amazon agency reports a 15% ACoS and calls it a win. But after you subtract COGS, advertising spend, Amazon's referral fees, FBA fulfillment, returns, and the promotional credits you ran last month, you lost $1.37 on every unit sold. This isn't a hypothetical. It's the reality for a significant number of CPG brands selling on Amazon who optimize for the wrong metric.
ACoS (Advertising Cost of Sale) tells you how efficiently your ads generate revenue. It tells you nothing about whether that revenue is profitable. Contribution margin tells you exactly how much money flows to your bottom line after every cost is accounted for. For CPG brands on Amazon, that distinction is the difference between growing profitably and scaling your way to bankruptcy.
This guide introduces the CM1/CM2/CM3 framework for Amazon profitability. It replaces the ACoS-centric view that dominates most Amazon advertising conversations with a framework that tells you, for every product and every campaign, whether you're actually making money.
Why ACoS Is the Wrong North Star for CPG Brands
ACoS measures advertising efficiency as a ratio of ad spend to ad revenue. It ignores every other cost involved in selling a product on Amazon.
Amazon advertising revenue crossed $56.2 billion in 2024, growing 20% year-over-year according to their Q4 earnings report. CPG brands are pouring money into this channel. But according to Jungle Scout's 2025 seller survey, the average Amazon seller margin sits at just 15 to 20% after all fees. When your margins are that thin, a "good" ACoS can still mean you're losing money.
Here's why ACoS misleads CPG brands specifically and what it hides:
| What ACoS Tells You | What ACoS Ignores |
|---|---|
| How much ad spend generated how much ad revenue | Whether the revenue covers your product costs (COGS) |
| Which campaigns are more efficient than others | Amazon's referral fee (8 to 45% depending on category) |
| How your ad efficiency trends over time | FBA fulfillment fees ($3.22+ per unit, increased 3 to 5% in 2025) |
| Relative ad performance across keywords | Return costs (CPG categories average 5 to 15% return rate) |
| Nothing about profitability | Promotional discounts, coupons, Subscribe & Save subsidies |
A 15% ACoS on a product with 50% gross margins is excellent. A 15% ACoS on a product with 22% gross margins after Amazon fees means you're losing money. ACoS doesn't tell you the difference. Contribution margin does.
The average ACoS across all Amazon categories is 30.4% according to Ad Badger's 2025 benchmark report. But that number is useless without margin context. A supplement brand with 75% gross margins can be profitable at 40% ACoS. A household cleaning brand with 40% gross margins can't survive at 20% ACoS once Amazon's fees are factored in. The same ACoS number means completely different things for different products — which is exactly why ACoS alone can't drive your strategy.
The CM1/CM2/CM3 Framework Explained
Contribution margin analysis for Amazon breaks down into three levels, each adding more cost layers. The three levels reveal exactly where your profitability stands and where the leaks are. I've used this framework with CPG brands ranging from $500K to $50M in Amazon revenue, and it consistently surfaces margin problems that ACoS-focused reporting hides.
CM1: Gross Contribution Margin
CM1 = Net Revenue minus Cost of Goods Sold (COGS)
This is your product margin before any Amazon-specific costs. It tells you the raw margin you have to work with. If CM1 is thin, no amount of ad optimization will make your Amazon business profitable. For CPG brands, COGS should include raw materials, manufacturing, packaging, labeling, and inbound shipping to Amazon. Many brands undercount COGS by leaving out packaging costs or shipping — which makes CM1 look better than it actually is.
CM2: Post-Advertising Contribution Margin
CM2 = CM1 minus Total Advertising Spend (including Sponsored Products, Sponsored Brands, Sponsored Display, and DSP)
This is the metric most brands should be managing their Amazon advertising against. CM2 includes all advertising costs: Sponsored Products, Sponsored Brands, Sponsored Display, DSP, and any promotional spend tied to advertising campaigns. If CM2 is negative, you're spending more on ads than the gross margin those ads generate.
CM3: True Profit Contribution
CM3 = CM2 minus All Amazon Fees and Variable Costs
CM3 is the bottom line. It subtracts Amazon's referral fees, FBA fulfillment fees, storage fees, return processing, coupon redemption costs, Subscribe & Save discounts, and any other variable costs. CM3 tells you how much money each product actually contributes to your business after Amazon takes its share.
Most CPG brands can calculate CM1 easily — they know their COGS. Many can estimate CM2 by pulling ad spend reports. But almost nobody calculates CM3 per SKU because it requires combining data from five or six different Amazon reports. That's the visibility gap this framework closes.
CM1/CM2/CM3 Calculation: A Real CPG Example
Here's what the framework looks like with real numbers for a CPG product selling at $24.99 on Amazon.
| Line Item | Amount | Notes |
|---|---|---|
| Selling Price | $24.99 | Average selling price after promotions |
| COGS | ($8.50) | Product cost including packaging |
| CM1 (Gross Margin) | $16.49 | 65.9% margin |
| Advertising (at 18% ACoS) | ($4.50) | Total ad spend allocated per unit |
| CM2 (Post-Ad Margin) | $11.99 | 48.0% margin |
| Referral Fee (15%) | ($3.75) | Amazon's category commission |
| FBA Fulfillment | ($3.68) | Pick, pack, ship (standard size) |
| FBA Storage | ($0.35) | Monthly storage, averaged |
| Returns (8% rate) | ($0.85) | Return processing + unsellable units |
| Subscribe & Save discount | ($0.62) | 5% discount on 25% of orders |
| CM3 (True Profit) | $2.74 | 11.0% margin |
Look at that progression. A product with a seemingly healthy 66% gross margin and an "efficient" 18% ACoS ends up at 11% true profit after all Amazon costs. Many CPG products have thinner margins than this example. If COGS were $11.50 instead of $8.50, CM3 drops to negative $0.26. You'd be losing money on every unit while your ACoS report looks green.
Here's the exercise I recommend for every CPG brand: run this calculation for your top 10 SKUs by revenue. Don't estimate — use actual COGS, actual Amazon fees from your settlement reports, and actual advertising spend allocated per unit. In my experience, at least 2 of those 10 products will have CM3 below 5%, and at least 1 will be negative. You're probably subsidizing unprofitable SKUs with your profitable ones right now and don't know it.
ACoS vs Contribution Margin: The Complete Comparison
ACoS and contribution margin aren't competing metrics. They answer different questions at different levels. The problem is that most brands only ask the ACoS question and never dig into the margin reality underneath.
| Dimension | ACoS / ROAS | Contribution Margin (CM1/CM2/CM3) |
|---|---|---|
| What it measures | Ad spend efficiency (spend / ad revenue) | Actual profit per unit after all costs |
| What it ignores | COGS, fees, returns, promotions, storage | Nothing (CM3 captures all variable costs) |
| Best for | Comparing campaign efficiency within an account | Making investment decisions: scale, cut, or hold |
| Dangerous when | Used as the sole success metric for profitability | Applied without category-specific benchmarks |
| Works with automation | Yes (most tools optimize for ACoS/ROAS) | Limited (few tools support CM-based optimization) |
| Decision quality | Can lead to scaling unprofitable products | Directly tied to business outcomes |
The best approach: use ACoS for daily campaign optimization (it's faster and simpler for bid adjustments) but use CM2/CM3 for strategic decisions (which products to invest in, which to sunset, where to increase or cut spend). Think of ACoS as your speedometer and CM3 as your fuel gauge. The speedometer tells you how fast you're going. The fuel gauge tells you how far you'll actually get.
Vendor Central vs Seller Central: Margin Differences
The CM framework applies differently depending on whether you sell to Amazon (Vendor Central, 1P) or on Amazon (Seller Central, 3P). The cost structures are different, and so are your control points.
| Factor | Vendor Central (1P) | Seller Central (3P) |
|---|---|---|
| Pricing control | Amazon sets retail price | You set retail price |
| COGS input | Cost = your wholesale price to Amazon | Cost = your actual manufacturing + packaging cost |
| Amazon's take | Wholesale discount (typically 40 to 55% off MSRP) | Referral fee (8 to 15%) + FBA fees |
| Advertising control | Full (you manage Sponsored ads) | Full (you manage Sponsored ads) |
| Typical CM3 range | 3 to 12% | 8 to 20% |
| Key margin lever | Negotiating higher wholesale price with Amazon | Optimizing FBA fees, reducing returns, pricing strategy |
| Returns impact | Amazon handles (chargebacks eat into margin) | Return processing fees + unsellable inventory |
Vendor Central brands typically have thinner CM3 margins because Amazon's wholesale discount is substantial. The trade-off is operational simplicity and access to Amazon's logistics. Seller Central gives you more margin control but more operational complexity. Many mid-market CPG brands are hybrid, using 1P for core products and 3P for higher-margin or specialty items.
The hybrid model can actually optimize CM3 across your portfolio: put low-margin, high-volume products on 1P (where Amazon handles logistics at scale) and keep high-margin products on 3P (where you retain more profit per unit). One pattern I see repeatedly: CPG brands on 1P who've never modeled what their margins would look like on 3P. The math sometimes reveals that switching specific SKUs from Vendor Central to Seller Central would improve CM3 by 5-8 percentage points. It's worth running the comparison for your top 20 SKUs, even if you ultimately stay on 1P for operational reasons.
Category Benchmarks for CPG on Amazon
Healthy contribution margins vary significantly by CPG category. Use these benchmarks to evaluate your own products, but remember they're averages — your specific results depend on your COGS, pricing strategy, and competitive intensity. Numbers are based on aggregated industry data and seller surveys from 2024 to 2025.
| Category | Typical CM1 | Typical CM2 | Healthy CM3 Target | Common Margin Killers |
|---|---|---|---|---|
| Food/Grocery | 40 to 55% | 25 to 40% | 8 to 15% | Low ASP, high return rates on perishables, heavy FBA fees relative to price |
| Beauty/Skincare | 60 to 75% | 40 to 55% | 15 to 25% | High advertising costs in competitive subcategories, return rates on shade mismatches |
| Supplements | 65 to 80% | 45 to 60% | 15 to 30% | Subscription cannibalization, regulatory labeling costs, heavy Amazon advertising competition |
| Household/Cleaning | 45 to 60% | 30 to 45% | 10 to 18% | Heavy/bulky products with high FBA fees, price sensitivity, private label competition |
| Baby/Childcare | 50 to 65% | 35 to 50% | 12 to 20% | Safety returns, seasonal demand swings, subscription dependency |
If your CM3 is below these ranges, you have a structural problem that advertising optimization alone can't fix. You need to address COGS, pricing, or fee structure before increasing ad spend. Throwing more ad dollars at a product with structural margin problems just scales the losses faster.
One benchmark that surprises most brands: Jungle Scout's 2025 seller survey found that the average Amazon seller margin sits at 15 to 20% after all fees. But that's the average across all categories and seller sophistication levels. CPG brands selling branded products with strong reviews and good COGS management should target the higher ranges in this table. If you're below the category average, it usually means you have one or more of the margin leaks described later in this guide.
Know Your Real Amazon Margins
Most CPG brands don't have a clear picture of CM3 across their product portfolio. Texin.ai builds contribution margin models for every SKU, identifies margin leaks, and restructures ad spend around profitability. Schedule a margin analysis.
When to Scale vs When to Cut: The CM Decision Matrix
The contribution margin framework turns subjective "should we spend more?" discussions into clear, data-driven decisions.
| CM3 Level | Decision | Action |
|---|---|---|
| CM3 > 15% | Scale aggressively | Increase budgets, expand keyword coverage, test Amazon DSP, launch Sponsored Brands. This product is a profit engine. |
| CM3 = 8 to 15% | Optimize and grow | Maintain current spend, optimize bids for CM2, reduce waste keywords. Focus on improving CM1 (negotiate COGS, reduce packaging costs). |
| CM3 = 1 to 8% | Stabilize or restructure | Cut low-performing campaigns, focus budget on highest-converting keywords only. Evaluate pricing and fee structure. Consider 3P if currently 1P. |
| CM3 = 0% or negative | Fix or exit | Pause advertising immediately. Recalculate: can pricing, COGS, or fulfillment changes make CM3 positive? If not, consider exiting the SKU or channel. |
Critical nuance: a negative CM3 product might still be worth keeping if it drives high TACoS (Total Advertising Cost of Sale) benefits, meaning it generates significant organic sales that make the total economics work. But this needs to be a deliberate, calculated decision, not an accidental one masked by a favorable ACoS number.
Another exception: new product launches. A new SKU typically needs 8-12 weeks of aggressive advertising to build ranking velocity, review volume, and organic traffic. During that period, CM3 will be negative — and that's OK, as long as it's planned and budgeted. The danger is when negative CM3 becomes the permanent state rather than a deliberate investment phase. Set a clear date (usually 90 days post-launch) where the product must hit positive CM3 or face a strategy change.
Implementing CM-Based Advertising Optimization
Moving from ACoS-based to CM-based advertising management requires changes to how you set targets, evaluate campaigns, and allocate budget. The shift isn't difficult technically — it's more about changing the mental model your team uses to evaluate performance. Most of the data you need already exists in your Amazon reports. You're just combining it differently.
Setting CM-Based Bid Targets
Instead of setting a target ACoS, calculate your maximum allowable ad spend per unit that maintains your CM3 target. Using our example product ($24.99, $8.50 COGS, $8.63 in Amazon fees):
- CM1: $16.49 (revenue minus COGS)
- Amazon fees: $8.63 (referral + FBA + storage + returns + S&S)
- Available for ads while maintaining 10% CM3: $16.49 - $8.63 - $2.50 (target CM3) = $5.36
- Maximum ACoS: $5.36 / $24.99 = 21.4%
Now you have a target ACoS that's derived from your profitability requirement, not from an arbitrary benchmark or industry average. This is a fundamentally different approach than saying "target 25% ACoS" across all products. Every SKU gets its own maximum ACoS based on its unique cost structure. A product with 70% CM1 and low Amazon fees might support a 35% ACoS. A product with 40% CM1 and heavy FBA fees might max out at 12% ACoS. One number doesn't fit all.
Portfolio-Level CM Analysis
Don't manage CM at the campaign level. Manage it at the product level. A single product might have five campaigns (auto, exact, broad, product targeting, Sponsored Brands) with different ACoS levels. What matters is the blended CM2 and CM3 for that product across all campaigns. Some campaigns are efficient (low ACoS) while others are expensive but drive volume that lowers per-unit fixed costs.
Using TACoS as a Complement
TACoS (Total Advertising Cost of Sale) measures ad spend against total revenue, including organic sales. It's useful alongside CM because it captures the halo effect of advertising on organic ranking. A product with 25% ACoS but 8% TACoS is generating significant organic sales that advertising supports. Factor this into your CM analysis by calculating CM3 against total revenue, not just ad-attributed revenue.
Want to win the digital shelf?
We help brands optimize listings, manage advertising, and outperform competitors on Amazon and Walmart.
Common Margin Leaks in CPG Amazon Accounts
After analyzing contribution margins for dozens of CPG brands on Amazon, these are the most common places where margin disappears. Most brands have two or three of these leaks active right now. Each one individually might seem small — a few percent here, a couple dollars there — but they compound. Three margin leaks each costing 3% of revenue add up to 9% off your CM3. On a $2M Amazon business, that's $180,000 per year leaking out.
- FBA size tier misclassification. Amazon measures your product packaging dimensions to determine fulfillment fees. A box that's 0.1 inches over a size threshold can jump you to the next fee tier, adding $1 to $3 per unit. I've seen a CPG brand save $1.40 per unit just by redesigning their box to be 0.2 inches shorter. On 50,000 units per year, that's $70,000 in recovered margin. Audit your top SKUs' packaging dimensions against Amazon's current size tier thresholds.
- Subscribe & Save erosion. S&S discounts (5 to 15%) compound with coupons and other promotions. If 40% of your orders are S&S with 10% discount, that's 4% off your top line before anything else.
- Return rate creep. CPG products average 5 to 15% return rates on Amazon. Each return costs the referral fee clawback plus return processing plus often a destroyed unit. The true cost of a return is usually 2-3x the FBA fee because you lose the product, the shipping, and the referral fee. Monitor return rates by ASIN weekly and investigate spikes immediately.
- Advertising waste on non-converting keywords. The average Amazon account has 30 to 40% of ad spend going to keywords that have never converted according to industry analyses. Regular search term reports and negative keyword management reclaim this waste. Pull your search term report monthly and negate every term that has spent more than $20 without a sale.
- Storage fee accumulation. Long-term storage fees (assessed monthly for inventory aged 181+ days) kill margins on slow-moving SKUs. Right-size your FBA inventory to avoid aged stock.
- Promotional stacking. Running a coupon, a Lightning Deal, and a Subscribe & Save discount simultaneously can reduce your effective selling price by 20 to 30%. Map all active promotions per ASIN and calculate the stacked impact on CM3.
- Ignoring inbound shipping costs. The cost to ship your products to Amazon's fulfillment centers is a real cost that many brands leave out of COGS calculations. If you're paying $0.50-$1.00 per unit in inbound shipping, that's a direct hit to CM1 that compounds through CM2 and CM3.
The fix for most of these leaks is visibility, not effort. Once you can see margin at the SKU level, the fixes are usually obvious. The problem is that most brands are flying blind — they see total Amazon revenue and total Amazon cost, but can't break it down to individual products. Building per-SKU CM3 visibility is step one. Everything else follows.
Getting Your Agency to Report on Contribution Margin
Most Amazon agencies and tool platforms report on ACoS and ROAS by default. Shifting to CM-based reporting requires specific asks.
What to Request
Ask your agency or internal team for a monthly report that includes: CM1, CM2, and CM3 by product (not just account level), CM3 trend over time (is profitability improving or declining?), a list of negative-CM3 products with recommended actions, and the maximum allowable ACoS per product based on CM targets.
Data Requirements
Your agency needs your COGS data per SKU to calculate CM1. They already have Amazon fees data (available in the Seller/Vendor Central reports) and advertising spend data. The COGS is typically the missing piece. Provide updated COGS quarterly as ingredient and packaging costs change. Include manufacturing cost, packaging, inbound shipping to Amazon, and any landed cost components. If your COGS is wrong, every margin calculation downstream is wrong — garbage in, garbage out.
Tool Support
Some Amazon advertising automation tools support CM-based optimization. Pacvue and Skai both offer profitability dashboards when you input COGS data. Most tools still default to ACoS optimization, so you may need to set custom targets that translate your CM goals into ACoS thresholds, using the formula in the bid targets section above.
For a deep dive into Amazon advertising tools and when to automate, read our Amazon Ads Automation guide. For foundational Amazon advertising strategy, see our Amazon Advertising guide.
Real-World CM Analysis: A Supplement Brand Case Study
A mid-market supplement brand came to us with what looked like a healthy Amazon business: $2.1 million in annual Amazon revenue, 22% ACoS (below their 25% target), and 4.3-star reviews across 45 SKUs. Their agency's monthly report was green across the board. But their CFO couldn't figure out why Amazon wasn't contributing more to the bottom line.
We built a CM3 model for all 45 SKUs. The results were eye-opening:
- 12 SKUs had CM3 above 18% — these were the profit engines generating 80% of the brand's Amazon profit
- 18 SKUs had CM3 between 5% and 15% — healthy but underperforming relative to their margin potential
- 9 SKUs had CM3 between 0% and 5% — essentially breaking even after all costs
- 6 SKUs had negative CM3 — collectively losing $14,000 per month while reporting "good" ACoS
The six negative-CM3 products were all lower-priced items (under $15) where FBA fees consumed a disproportionate share of revenue. Their ACoS looked fine, but Amazon's fees plus advertising plus S&S discounts exceeded the gross margin. The brand was losing money on every sale of these products and advertising was just accelerating the losses.
The fix: paused advertising on the 6 negative products (saving $4,200/month in ad spend), raised prices on 3 of them where competitive dynamics allowed it, repackaged 2 into larger multi-packs that improved the FBA fee ratio, and discontinued 1 product that had no path to profitability on Amazon. Within 90 days, their total Amazon profit increased 34% while total revenue decreased just 8%. Less revenue, much more profit.
That's the power of CM-based analysis. The ACoS report would have told them everything was fine. The CM3 model told them six products were silently eroding their profits.
Stop Optimizing for the Wrong Metric
Texin.ai manages Amazon advertising with contribution margin as the primary KPI, not ACoS. We build per-SKU CM models, eliminate margin leaks, and scale the products that actually drive profit. Talk to us about your Amazon profitability.
Frequently Asked Questions
What's a healthy CM2 on Amazon for CPG brands?
A healthy CM2 varies by category but generally falls between 25% and 55%. Beauty and supplements tend toward the higher end (40 to 55%) due to higher gross margins, while food and household products sit lower (25 to 40%) due to lower selling prices relative to FBA costs. The key metric is CM3 (after all fees), which should be at least 8 to 15% for sustainable growth. If CM2 looks healthy but CM3 is thin or negative, Amazon fees are eating your ad-generated margin.
Can I use contribution margin with automated bidding tools?
Yes, but it requires translating CM targets into ACoS thresholds that the tools understand. Calculate your maximum allowable ACoS per product using the formula: (CM1 minus Amazon fees minus target CM3) divided by selling price. Set this as your target ACoS in your automation tool. Pacvue and Skai both support custom profitability inputs. Amazon's native "dynamic bids" feature doesn't support CM directly but can be constrained with proper ACoS caps.
How does contribution margin differ between 1P and 3P?
In Vendor Central (1P), your "cost" is the wholesale price Amazon pays you, which is typically 40 to 55% below MSRP. Your CM1 is thinner because Amazon takes a larger upfront cut, but you avoid individual fulfillment fees. In Seller Central (3P), your COGS is your actual manufacturing cost, giving higher CM1, but you pay referral fees plus FBA fees per unit. 3P typically yields higher CM3 (8 to 20%) versus 1P (3 to 12%), but 1P is operationally simpler.
What should I do if my CM3 is negative on Amazon?
First, pause or significantly reduce advertising on the negative-CM3 products. Then diagnose: is the issue COGS (product cost too high for the selling price?), advertising (spending more than the margin can support?), or Amazon fees (product dimensions triggering expensive FBA tiers?). Common fixes include raising prices, renegotiating supplier costs, downsizing packaging to a cheaper FBA tier, or reducing promotional stacking. If none of these create a path to positive CM3, consider exiting that SKU from Amazon. Don't keep a product on Amazon out of inertia. If it can't be profitable on the platform, redirect that energy and inventory to channels where it can.
How do I get my agency to report on contribution margin instead of ACoS?
Provide your agency with per-SKU COGS data and request a monthly CM report broken down by CM1, CM2, and CM3 per product. Ask them to calculate maximum allowable ACoS per product based on your CM3 targets. Most agencies can build this with existing Amazon reports (revenue, fees, ad spend) plus your COGS input. If they resist, it may indicate they're managing to ACoS targets that look good on reports rather than driving actual profitability.