TL;DR
Contribution Margin 3 (CM3) tells you how much profit you’re marking after marketing costs. Unlike CPA, or AOV, or ROAS – it helps us understand the only question that matters: are we making real money? This post explains why it’s important and how to measure it.
The problem with metrics today
Thanks to every Shopify plugin in the world, we’ve got more metrics than we know what to do with. Every data dashboard out there promises to give you the true insight into your business.
You might be focusing on CPA but that ignores how much revenue you’re really generating from those sales.
Or maybe you focus on ROAS, but that ignores how profitable that ad spend is – and ignores the nuances of production selection and bundling and discounting.
Maybe you’re focused on conversion rate (CVR) but this doesn’t tell you whether you’re attracting less profitable customers by getting more of them.
Or maybe you’re focused on cost per clicks or clickthrough rates or thumbstop rates. In which case, I’d remind you that CTR is a shitty metric that does not correlate to a sale.
CM3 is the metric that takes into account all of these aspects together.
Consider these examples:
Example one: free shipping threshold
We ran a test last year with a client where we were identifying the ideal free shipping threshold.
This was instinctively a conversion test. We wanted to improve conversion rate.
We lowered the threshold for free shipping from £40 to £30 and indeed did see a good conversion rate improvement. BUT, when we looked at the overall profitability of that A/B test with CM3 as the benchmark we were losing over £1.50 more per sale even accounting for the CPA improvement.
Example two: high-value intro offer bundle
Another client experiment last year, we tested bundling together a lot of extra value in the first shipment.
This experiment had a few purposes:
We wanted to improve CVR/CPA
We wanted to improve retention by increasing product use
The experiment had a minor improvement to CPA – not a stepchange but nothing to ignore.
The experiment also had 325% better retention rates than the core experience. How many experiments can do that? This looked like a solid win.
However, the CM3 on that first order was so bad because of the free stuff that we would have needed 10x better retention to break-even in CM3 terms and at far slower payback.
CM3 is not just useful for experiments
CM3 is the centre of almost all of our client dashboards. We do that because it’s the one metric that reveals where everything is profitable. If your CM3 is negative, you better know you can earn that margin back with repeat and quickly.
Vanity metrics win meetings. CM3 saves companies.
What is CM3? Explained for marketers and founders, not finance teams
That shows you CM3 at a high level, but you can also then divvy this up per new order:
A bit of background.
So, CM is an accounting term. But it’s one that’s vital for every founder, growth lead and marketing head to know.
Take your net revenue and subtract your COGS. This gives you “CM1”.
Now take away your shipping and transaction fees (i.e. Shopify or Stripe) and you’ve got CM2.
Take away marketing costs and now you’ve landed on CM3.
Let’s visualise that a little bit and define some variables.
These should all be clear enough.
NET REVENUE - COGS = CM1
CM1 - FEES - LOGISTICS = CM2
Now take away your marketing spend to get CM3.
CM3 in actual cash terms (over per order)
CM3 per order is a great benchmark for overall unit economics efficiency. Likewise CM3 per session is a great way to judge per visit profitability and return.
But the other side to CM3 is getting an overview of impact to your cashflow.
We recommend adding daily, weekly, monthly CM3 in cash amounts to your dashboards. That way you can see how much your business is making in profit or loss over each time period.
In the earliest stages of your business, this then simplifies the process of understanding how close to cash flow profitable you are. If you know your fixed costs amount to £20k per month, then that gives you a monthly CM3 goal to hit to break-even.
Depending on your business model this might not equate to actual in-month profit and loss, but it will give you an understanding of how well you’re doing.
Why CM3 beats CPA, CVR, AOV and other benchmarks
Each of these metrics only reveals part of the information.
CVR ignores margin
AOV is too simplistic as it ignores variance in basket arrangements
CAC is incomplete
ROAS ignore margin difference
These are all incomplete, and they don’t reveal that overall business benchmark. CM3 is the only metric that shows if the acquisition is profitable right now. You should be measuring system-wide CM3 (i.e. the overall reflection on your business) as well as per-experiment CM3 to understand how close to profitability you are.
What happens when you don’t track CM3
Show me the incentive and I’ll shout you the outcome – Charlie Munger
Lots of brands optimise towards CPA or CAC. If you’re a single-product, no-variant business then this is probably fine. But if you’re not then you will know that not all customers are created equally.
For simplicity sake, let’s imagine you’re single-product but you do have people ordering a wide variety of shipment sizes. And the quantities of your product really determine profitability.
At Wine List we had this exact issue: Logistics costs dropped significantly for every additional line item ordered.
Shipping one bottle of wine cost us around £5.25, but shipping two cost us £6.10, while shipping size cost us £10.
If your average basket contains three bottles, then you might be able to work out a rough cost in the middle, but the distribution of those orders impacts the CM2 for each delivery.
Now let’s also remember with an equation like this we might try to pass on some cost of logistics to the customer.
But remember – every cost change impacts conversion rate. Start charging for shipping that changes conversion rate and therefore your CPA.
Price changes also change how people buy and therefore change the weighting of bottles.
CM3 becomes the only way to measure these things in conjunction.
Set a goal and people aim towards it
Goal-setting is important but every incentive changes outcomes.
Very often you might set your marketing team the goal of reducing CPA. At Ballpoint, we get given this goal a lot too.
When working with an ad platform like Meta, you also explicitly set these goals. By default, Meta aims to have the lowest CPA possible by maximising the number of conversions it looks to acquire.
In both examples, both the marketer and the ad system, you may end up getting cheaper customers acquired because you’re optimising for low CPA.
Set a goal of high CM3 in cash terms, and there’s less to hide behind – and it reveals the nuance that naturally makes up your business.
How and when to use CM3 in practice
We recommend adding CM3 to all of your dashboards. A metric that isn’t measured is ignored.
Adding CM3 will redirect conversations towards profitability rather than less revealing metrics. Low value / high value, small baskets / big baskets, there’s no hiding with CM3.
CM3 then becomes the becnhmark to use for every experiment you run.
Changing shipping threshold? Check CM3
Changing pricing? Check CM3
Changing the hero image on your website? Check CM3
Charging for packaging? Check CM3
Amending your intro offer? Check CM3
Introducing ads that target higher priced items? Check CM3
Everything now becomes rooted in profitability.
Oh and if you’re making changes to your website frequently – then STOP. One of the biggest causes of ‘sudden CPA change’ is that the website changed without updating the marketing team. Any website change should be logged so that CM3 can be measured. Ideally A/B tested, but if that’s not possible logged.
Make profit the narrative again
CM3 sounds boring. It’s not sexy. It comes from accounting for God’s sake.
And it’s not the amount of spend or number of customer acquisitions. But it is the crux of your business.
If you’re not measuring CM3, then the likelihood is your marketing isn’t working as well as you think it is.
This isn’t just something founders should know. Make CM3 a topic of conversation across the entire business. When everyone from your customer support agents through to your product manager understands CM3, the business will do better.
If you’re working in a company and don’t know these figures, raise the conversation. If you’re managing a marketing team and they don’t talk about it, then raise the conversation. And god forbid if your agency doesn’t talk about it, then ask them how they optimise towards the right things.
CM3 is the truth serum. Use it, or just keep guessing.
🔗 When you’re ready, here’s how Ballpoint can help you
→ Profitably grow paid social spend from £30k/m → £300k/m
→ Create full funnel, jobs to be done-focused creative: Meta, TikTok, YouTube
→ Improve your conversion rate with landing pages and fully managed CRO
→ Maximise LTV through strategic retention and CRM - not just sending out your emails
Email me – or visit Ballpoint to find out more.
NB: We support brands spending above £20k/month.
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