Contribution Margin 1 and Contribution Margin 2
Most people understand Gross Profit or Contribution Margin as Sales - Variable Costs. However, when we build MIS for startups, there are two levels of Contribution Margin you need to look at to assess unit level profitability.
Contribution Margin 1 (CM1) = Sales - Variable Costs
CM1 has to be positive right from your first sale.
CM2 = CM1 - Customer Acquisition Cost (CAC)
CM2 may be negative for the first couple of years when a tech startup maybe spending heavily on marketing to get app installs or visibility. But it has to reach net positive at the earliest to exponentially increase business value immediately.
Build this into your Financial MIS and see the difference.
