How to calculate Contribution Margin 2 (CM2)?

Contribution Margin 2 (CM2) quantifies the profit margin after variable production, distribution, and marketing costs are deducted from the revenue.

Essentially, you deduct marketing costs from CM1.

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Example:
An online Indian electronics store runs a marketing campaign for a specific smartphone model.

The smartphone is priced at ₹20,000. The direct material and labor cost per unit is ₹12,000. The marketing campaign costs ₹30,00,000 and results in the sale of 500 units.

The variable marketing cost per unit is calculated as: Campaign Cost / Number of Units Sold = ₹30,00,000 / 500 = ₹6,000 per unit.

Therefore, the CM2 per smartphone sold would be:

CM2 = Net Revenue per unit - (Variable Production Costs per unit + Variable Marketing Costs per unit)

CM2 = ₹20,000 - (₹12,000 + ₹6,000) = ₹2,000

CM2% = CM / Net Revenue = ₹2,000 / ₹20,000 = +10%

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Significance of CM2:
CM2 and CM2% are key indicators of the profitability of each unit sold by a business.

If the management is satisfied with CM1 % (i.e. it is comparable to that for other businesses in the same category), but not satisfied with the CM2%, marketing spends specifically need to be looked into.