Profit foundations
Gross, contribution & net margin, untangled
Gross, contribution, and net margin measure different things, and confusing them is how stores think they're profitable while losing money. Learn which to use when.
Most founders track one margin and mislead themselves. Gross margin ignores fulfillment and fees. Net margin buries per-order economics under fixed costs. Contribution margin, the dollars each order leaves after ALL variable costs, tells you whether you can afford to advertise. AI computes all three and shows which decision each drives.
Gross, contribution & net margin, untangled
These three margins measure different things. Mix them up and a store can feel profitable while quietly losing money on every ad.
AI can compute all three from your numbers and say which decision each one drives. You supply the real costs, because AI must never invent your COGS, fees, or overhead.
Fastest path: one prompt, end to end
AI prompt — paste into ChatGPT / Claude
You are a DTC finance analyst. Use MY numbers only (invent nothing). Avg order value (AOV): [$] COGS per order: [$] Variable per-order costs (shipping, payment fees, pick/pack, transaction): [$] Monthly fixed costs (rent, software, salaries, base ad retainer): [$] Orders/month: [#] Do this and show the arithmetic: 1. Gross margin = (AOV - COGS) / AOV. 2. Contribution margin per order = AOV - COGS - variable costs, and as a %. 3. Net margin = (total contribution - fixed costs) / total revenue. 4. Explain in one line each: which decision gross, contribution, and net each should drive. 5. State the max customer-acquisition cost I can pay (= contribution margin per order for first-order breakeven). If a number is missing, ask; do not assume. Output: the three margins with math + what each governs + max CAC.
Or do it in 4 steps
- Gross margin = (AOV − COGS) ÷ AOV. Useful for pricing and picking products, but it ignores shipping and fees, so it flatters you. Never make ad decisions on it: gross margin will tell you a losing campaign is fine.
- Contribution margin = AOV − COGS − all variable costs. This is the real dollars each order leaves for fixed costs and profit. It's also the number that governs advertising: on a first order, your max customer-acquisition cost equals it. The most important and most-skipped margin.
- Net margin = (total contribution − fixed costs) ÷ revenue. The bottom line after overhead. It tells you if the whole business is profitable, but it's too blunt for per-order or per-campaign decisions.
- Use the right one for the question. Pricing a product → gross. Can I afford this ad / this CAC → contribution. Is the business making money → net. Most "we're profitable but broke" confusion is using gross where contribution belongs.
Worked example (labeled): AOV $60, COGS $18, variable costs (ship $6 + fees $2 + pick/pack $1) $9. Gross margin = (60−18)/60 = 70%. Contribution = 60 − 18 − 9 = $33 (55%).
So a campaign at a $40 CAC is losing money, despite that healthy-looking 70% gross margin. Contribution ($33) is your true ceiling. Net then subtracts fixed costs across all orders. Run your own numbers.
Recompute when any cost or price changes; watch contribution margin most, it's the one ads live or die by.
Do
- ✓Compute all three margins from the same order: gross for pricing, contribution for ads, net for the whole business.
- ✓Treat contribution margin per order (AOV minus COGS minus all variable costs) as your true ceiling on customer-acquisition cost.
- ✓Subtract every variable cost, shipping, payment fees, pick and pack, before calling anything margin.
- ✓Recompute the moment any cost or price changes, and watch contribution margin most closely.
Avoid
- ✕Don't make ad decisions on gross margin; it ignores shipping and fees, so it will call a losing campaign fine.
- ✕Don't use net margin for per-order or per-campaign calls; it buries unit economics under fixed costs.
- ✕Don't run a campaign at a CAC above your contribution margin per order; a 70% gross margin can still lose money at a $40 CAC.
- ✕Don't skip contribution margin, the most important and most-skipped number, and then wonder why you're profitable but broke.
Quick tips
- Match the margin to the question: pricing a product goes to gross, affording a CAC goes to contribution, is-the-business-profitable goes to net.
- Your max first-order CAC equals contribution margin per order; anything above it only pays back on the repeat purchase.
- Feed the AI your real COGS, fees and overhead; it must never invent them or every margin is fiction.
Brand in focus
Casper — high gross margin, thin contribution after everything
Casper.com
Casper fits because its mattresses carried a fat gross margin yet the business lost money for years, the exact trap of reading gross where contribution belongs. Once free shipping on a bulky boxed mattress, generous returns, and heavy paid acquisition were subtracted, the true contribution per order was thin and CAC often ran above it. What Casper did well was build a category and a brand fast. Watch-out: it scaled ad spend against a gross-margin illusion rather than contribution, so the lesson is to price ads against contribution margin, not the flattering top-line number.