Unit economics: margin, contribution and breakeven

Three quantities are all called margin in ordinary speech, and confusing them is the most expensive vocabulary error in retail.

mark-up            = (29.00 − 10.18) / 10.18  = 184.9%
gross margin       = (29.00 − 10.18) / 29.00  =  64.9%
contribution/order =  29.00 − 10.18           = £18.82

Mark-up is how you talk to a supplier. Gross margin is how you compare products against each other. Contribution per order is the one that pays for advertising, for the fixed costs, and eventually for you — and it is the only one denominated in money rather than in percent. A 64.9% margin on a £29 item and a 64.9% margin on a £4 item are not the same business, because the first hands you £18.82 to spend on finding a customer and the second hands you £2.60.

The ceiling on customer acquisition

Contribution per order is, exactly, the most you can pay to acquire one order and still break even. Above it you are buying orders at a loss; below it, the difference is what remains to cover fixed cost.

max CPA (breakeven)   = contribution per order = £18.82

breakeven ROAS        = price / contribution
                      = 29.00 / 18.82 = 1.54

target CPA at £520/mo fixed cost and 150 orders:
  fixed cost per order = 520 / 150 = £3.47
  CPA to break even overall = 18.82 − 3.47 = £15.35

Breakeven ROAS of 1.54 means every £1 of advertising must return £1.54 of revenue merely to leave you where you started. It is a floor, not a goal. Any campaign held to a target below it is losing money in a way that a revenue dashboard will happily describe as growth.

Repeat purchase changes the ceiling, but only if you can prove it

If a customer reliably buys twice, the ceiling is the contribution of both orders, and you may pay more to acquire the first. This is a correct argument that ruins stores, because it is usually made before any repeat purchase has been observed. The discipline is simple: raise the ceiling only by the repeat contribution you have actually measured on a cohort old enough to have repeated, and never by the repeat rate you expect. Until then, one order is the ceiling.

Figures in this lesson are illustrative inputs chosen so the arithmetic can be checked. They are not measurements. What FlowFinds Solutions actually measures is published, with its artifacts, in research.