Unit Economics in E-Commerce: The 5 Numbers That Matter

A store can grow and still edge closer to the abyss every month – revenue tells you nothing about that. What matters is a cascade of five numbers: three contribution margins, plus CAC and LTV. Together they show not just whether a business is profitable, but where exactly the money is disappearing if it isn’t.

Key takeaways

• Revenue growth says nothing about profitability – only the contribution margin cascade, CM1 through CM3, shows the truth.
• CM3 is the number that matters: only after marketing costs does it become clear whether an order really makes money.
• CAC and LTV put the single order into the context of overall customer value.
• The cascade is above all a diagnostic tool: it shows whether the problem sits in buying, in process, or in marketing.
• Unit economics belong on the table monthly – weekly, if you’re growing fast.

CM1, CM2, CM3: the cascade

Contribution margin 1 (CM1) is revenue minus pure cost of goods – the gross margin. Contribution margin 2 (CM2) subtracts the variable cost of fulfilment on top: fulfilment, payment fees and the proportional cost of returns – many stores underestimate just how heavily returns weigh in here, as our article on returns management shows. Contribution margin 3 (CM3) additionally subtracts the proportional marketing spend per order – the figure that ultimately shows whether an order actually makes money or costs it. Only CM3 tells the truth; CM1 alone has lulled plenty of founders into a false sense of security.

The word “cascade” is deliberate: each stage builds on the one before it and subtracts further, realistic costs. Stop calculating at CM1 and you only see the gross margin – a number that looks good on any price list but says nothing about whether money actually ends up staying in the business.

A worked example

Take a hypothetical basket worth €60. Cost of goods comes to roughly €24, leaving a CM1 of €36. Fulfilment, payment fees and the proportional cost of returns together cost around €12 – so CM2 comes to €24. Add roughly €20 of marketing cost per order and you’re left with a CM3 of just €4. The business is profitable, but with wafer-thin padding – a small rise in ad costs or a discount weekend tips CM3 straight into negative territory.

Stage	Amount	Calculation
Revenue	€60	Basket value
CM1	€36	− €24 cost of goods
CM2	€24	− €12 fulfilment / payment / returns
CM3	€4	− €20 marketing

This is exactly the pattern you miss if you only look at revenue – the basket looks identically profitable on paper, whether CM3 sits at €4 or at minus €4.

CAC and LTV: looking beyond the single order

CAC (Customer Acquisition Cost) is what it costs to win a new customer. LTV (Customer Lifetime Value) is the value that customer brings across all their future orders. A single order doesn’t necessarily need a positive CM3 if the customer reliably comes back – but that bet should rest on real repeat-purchase data, not hope.

How much a dedicated retention channel drives LTV and repeat-purchase rate is shown in our article on email/CRM as the most profitable channel – often the cheapest lever for offsetting a thin CM3 margin through repeat purchases. How quickly this calculation can flip when channels differ in how much they favour repeat versus first-time purchases is shown in our comparison your own store versus a marketplace.

Worked through concretely: staying with the basket from the example above, with a CM2 of €24 per order. If an average customer buys three times a year, that gives a rough annual LTV on a CM2 basis of €72. At a CAC of €25, that leaves a healthy gap of €47 – even if the first order alone doesn’t cover the CAC. This is exactly the view beyond the single order that explains why many successful stores deliberately take a short-term loss on new-customer acquisition: they know their repeat-purchase rate and factor it in, rather than ignoring it.

The five numbers at a glance

Metric	Formula	Shows
CM1	Revenue − cost of goods	Gross margin
CM2	CM1 − fulfilment/payment/returns	Operating margin
CM3	CM2 − proportional marketing	Is the order actually profitable?
CAC	Marketing cost ÷ new customers	Cost per new customer
LTV	Avg. order value × repeat-purchase rate × margin	Value of a customer over time

Diagnostic patterns: where exactly is it burning?

The cascade is valuable above all as a diagnostic tool. If CM1 is already negative, your pricing or buying calculation is wrong. If CM2 is positive but CM3 is negative, that’s a marketing problem – ad spend is eating a healthy operating margin. If CM2 is already negative, the problem sits deeper, in fulfilment, payment methods or return rate. This distinction decides whether the right answer is “cut the ad budget” or “rework the processes” – and confusing the two is exactly one of the silent killers we describe in our article why e-commerce startups fail.

The most common mistakes when working with unit economics

1. Calculating only at order level, never at product level – or the other way round.
2. Mixing fixed costs into the variable cascade and distorting CM3 as a result.
3. Not allocating returns proportionally into CM2, but “forgetting” them separately instead.
4. Calculating CAC only for new customers while ignoring discount costs for existing ones.
5. Estimating LTV on wishful thinking instead of real cohort data.

Step by step: building a simple unit economics dashboard

1. Record cost of goods cleanly by product – CM1 stands or falls on accurate purchase prices.
2. Establish fulfilment, payment and return costs per order as an average by channel, rather than guessing.
3. Calculate marketing cost per order: a channel’s total spend divided by the orders it generated.
4. Map the CM1-to-CM3 cascade in a simple table for the last four to eight weeks, to see trends rather than single figures.
5. Calculate CAC separately by channel – a channel with a good average CAC can still be hiding a few very expensive campaigns.
6. Derive repeat-purchase rate from the last six to twelve months of order data and build a rough LTV on top of it.
7. Anchor this review firmly in the calendar – weekly for CM1 through CM3, monthly for CAC and LTV.

You can start this with a simple spreadsheet; a dedicated BI tool only pays off once order volume makes manual upkeep noticeably harder.

The bottom line

Five numbers are enough to judge an e-commerce business honestly – provided they’re calculated cleanly and regularly. See CM1 through CM3 every month and weigh CAC against LTV, and you’ll spot structural problems months before they hit your cash position. The next step is rarely a new metric – it’s the discipline of actually looking at the existing five every week.