Contribution Margin Explained: CM1, CM2, and What They Mean for Your Growth

When it comes to scaling an eCommerce business — whether you’re selling on Amazon, Shopify, Walmart, or across multiple channels — profitability is everything. But profitability isn’t just about gross margin. It’s about understanding the true economics of every product you sell.

That’s where contribution margin (CM) comes in.

Contribution margin tells you exactly how much profit each unit contributes to your business after covering specific costs. By analyzing CM1 and CM2, you can see the health of your business at a granular level, identify which products to scale, and avoid investing in SKUs that drain cash flow.

In this guide, we’ll break down contribution margin step by step, explain CM1 and CM2 in the context of Amazon FBA and Shopify sellers, and show how tracking them can drive smarter growth.

What is Contribution Margin?

At its core, contribution margin is a way to measure profitability beyond surface-level revenue and gross margin. It shows:

• How much profit a SKU generates after accounting for direct costs.

• Which products actually contribute to covering your fixed costs and profit goals.

• Where hidden cost leaks are eating away at your margins.

In eCommerce, contribution margin is particularly important because costs are layered and dynamic — freight rates change, Amazon fees fluctuate, and advertising expenses vary. Without CM tracking, sellers often scale the wrong products, overspend on ads, or misprice SKUs.

CM1: Contribution Margin 1

Definition:
CM1 is your net sales minus true landed cost of goods sold (COGS).

Formula:
CM1 = Net Sales – Landed COGS

What’s included in landed COGS?

• Factory unit cost (supplier invoice)

• Freight and shipping costs (allocated by CBM or weight)

• Customs duties and tariffs (HS code–based)

• Insurance, inspection, packaging, labeling

• Any other per-unit costs before your product reaches the warehouse

Why CM1 matters:

• Shows your real gross profit per SKU, not just factory margin.

• Highlights products that look profitable on paper but lose money once tariffs or freight are included.

• Forms the foundation for all deeper profitability analysis.

Example:

• Net Sales: $20

• Factory Cost: $5

• Freight/Duty Allocation: $2

• Landed COGS: $7

• CM1 = $13 (65%)

Without CM1, sellers often overestimate margins and misprice SKUs.

CM2: Contribution Margin 2

Definition:
CM2 goes a level deeper by subtracting variable operating costs like marketplace fees, fulfillment, shipping, and transaction costs.

Formula:
CM2 = Net Sales – Landed COGS – Variable Expenses

What’s included in variable expenses?

• Amazon FBA fees (pick, pack, storage, referral)

• Shopify transaction fees

• Third-party logistics (3PL) costs

• Payment processing fees

• Shipping to customers

• Returns and refunds

Why CM2 matters:

• Reveals SKU profitability after you account for selling and fulfillment costs.

• Helps decide which SKUs to scale with ads (only invest in high-CM2 products).

• Prevents you from pouring ad spend into SKUs that can never be profitable.

Example:

• CM1: $13

• Amazon FBA Fees: $4

• Transaction Fees: $1

• Shipping: $1

• CM2 = $7 (35%)

Now you know the real margin left to cover overhead, marketing, and profit.

Why CM1 and CM2 Are Critical for eCommerce Sellers

1. Smarter Pricing Decisions

Without CM tracking, you might price a SKU based on factory cost alone. With CM1 and CM2, you see the full cost picture and can price for profitability — not just to compete.

2. Advertising ROI

If you’re running Amazon PPC or Meta ads, every dollar needs to generate contribution profit. CM2 shows which SKUs can handle ad spend and still deliver margin.

3. Inventory Planning

Scaling SKUs with low CM2 ties up cash in products that can’t sustain your growth. Contribution margin analysis ensures inventory investment flows into profitable winners.

4. Exit Valuation

When buyers evaluate your business, they look beyond gross margin. They want to see contribution margins that prove profitability is sustainable across SKUs. Clean CM dashboards = higher multiples.

The Link Between Landed Cost and Contribution Margin

Here’s where things get tricky: you can’t calculate accurate CM1 or CM2 without precise landed cost tracking.

• Misallocating freight evenly across SKUs? Your CM1 is wrong.

• Ignoring customs duties or tariffs? Your CM1 is inflated.

• Forgetting to reconcile estimates vs. actual freight invoices? Your CM2 is unreliable.

This is why many Amazon FBA sellers run into trouble. They rely on spreadsheets or guesswork to split costs, which creates misleading margins. The result? Overspending on ads, stocking unprofitable SKUs, and losing money silently.

Common Mistakes Sellers Make with Contribution Margin

1. Using factory cost instead of landed cost in CM1
   → Leads to inflated profitability numbers.

2. Not allocating freight and duty correctly
   → Costs should be divided by CBM or weight, not evenly across SKUs.

3. Ignoring variable fees in CM2
   → FBA fees, shipping, and refunds must be included for true accuracy.

4. Failing to track variance (estimate vs. actual)
   → Forecasts are fine, but reconciliations keep you grounded in reality.

5. Treating all SKUs equally
   → Some SKUs will always be margin-killers. CM2 exposes them early.

How to Track CM1 and CM2 Effectively

Step 1: Centralize Documentation

Keep invoices, freight bills, and customs docs in one place. Every SKU should have a cost history tied to actual shipments.

Step 2: Automate Cost Allocation

Use software to allocate freight and duties based on CBM or weight, not manual guesswork.

Step 3: Build Real-Time Dashboards

Track CM1 and CM2 at the SKU, PO, and shipment level. Update automatically as invoices are received.

Step 4: Monitor Variances

Reconcile forecasted vs. actual costs per shipment. Use variance insights to negotiate better supplier or freight terms.

Step 5: Use Contribution Margins for Decisions

• CM1 guides pricing and COGS control.

• CM2 guides advertising, SKU scaling, and inventory investment.

The SellerVue Advantage

Most sellers struggle with contribution margin because their systems aren’t built for it. Spreadsheets are fragile, and accounting tools don’t track SKU-level landed costs.

That’s why SellerVue was built — to give sellers audit-ready accuracy and real-time insights into profitability.

With SellerVue, you can:

• Build POs, match invoices, and centralize docs.

• Automate landed cost allocation per SKU.

• Track variances between estimates and actuals.

• Monitor CM1 and CM2 in real time across SKUs and shipments.

• Deliver dashboards that impress investors and buyers.

On average, SellerVue users recover 2–3% of revenue in hidden cost leaks — profit that directly improves both cash flow and exit valuation.

Final Thoughts

Contribution margin (CM1 and CM2) is more than just a financial metric — it’s a growth compass for eCommerce sellers.

• CM1 reveals the true profitability of each SKU after landed costs.

• CM2 shows what’s left after fulfillment and selling fees.

• Together, they guide smarter pricing, advertising, and inventory decisions.

If you’re serious about scaling your eCommerce brand — and maximizing your exit value — tracking contribution margins is non-negotiable.

👉 Ready to stop guessing and start scaling with confidence? Watch the SellerVue demo and see how accurate contribution margin tracking can transform your business.