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.