What is Contribution Margin?

How contribution margin actually works

Work it per order. Start with net revenue after GST and discounts, then subtract cost of goods, packaging, the Delhivery or Shiprocket charge, the Razorpay fee, an allocated cost for RTO and returns, and finally acquisition spend divided by orders.

A Rs 1,500 apparel order might run like this: Rs 1,270 net of GST, minus Rs 480 product, minus Rs 90 shipping and packing, minus Rs 25 gateway, minus Rs 120 for returns and RTO, minus Rs 400 acquisition. Around Rs 155 left. Roughly a tenth of the order.

Where teams get contribution margin wrong

Stopping at gross margin. Gross margin answers a manufacturing question about the spread between price and product cost, whereas contribution margin answers the business question of whether that order was worth fulfilling at all, and the two can sit forty points apart.

Second, treating returns as an occasional annoyance rather than a line item. In apparel and footwear they are structural. Bake the expected cost into every order.

Third, ignoring the split between first and repeat orders, because first orders carry the entire acquisition load and often land near zero while repeat orders carry almost none. A brand losing Rs 200 on order one and making Rs 500 on orders two and three is healthy. A brand that never sees order two is not.

What good looks like in India

COD is what separates Indian unit economics from Western playbooks. A COD order carries collection fees, higher RTO risk and delayed cash, and many brands find their COD contribution margin sits several points below prepaid on the same product at the same price.

Which is why prepaid incentives, address checks on high-risk pin codes and a WhatsApp confirmation before dispatch keep appearing in Indian D2C operations. None of them are marketing tactics. All of them move margin further than a bid adjustment ever will.