Unit Economics

D2C Unit Economics Formula — CM1, CM2, LTV:CAC for Indian Brands

D2C unit economics comes down to one question: does each order generate more cash than it costs to acquire and fulfil? CM1 tells you about the order; CM2 tells you about the customer. LTV:CAC tells you if the model compounds.

Calculate CM1, CM2, LTV:CAC for your brand across all stores.

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CM1 — Contribution Margin 1 (per order)

CM1 = Revenue − COGS − Platform Fees − Fulfilment − Returns

CM1 measures profitability at the order level before customer acquisition cost. It tells you whether your product economics work, independent of marketing.

For a skincare brand selling a ₹799 face serum on Amazon India:
- Revenue: ₹799
- COGS (38%): ₹303
- Amazon referral fee (18%): ₹144
- Easy Ship fulfilment: ₹60
- Returns (10%): ₹80
- CM1 = ₹212 (26.5%)

Category benchmarks for Indian beauty brands: CM1 of 25–40% is healthy. Below 20% is structurally problematic.

CM2 — Contribution Margin 2 (per acquired customer)

CM2 = CM1 − Customer Acquisition Cost (CAC)

CM2 measures whether you made money on the first purchase from a new customer after marketing spend.

Continuing the example, with a Meta Ads CAC of ₹180:
- CM1: ₹212
- CAC: ₹180
- CM2 = ₹32 (4% of revenue)

For Indian D2C beauty brands, a CM2 of 5–15% is sustainable. The model works because repeat purchases have zero CAC — the second order is pure CM1 profit.

LTV, Payback Period, and LTV:CAC

LTV (Lifetime Value) = Average Order Value × Purchase Frequency × Gross Margin × Retention Rate

For a typical Indian beauty repeat-purchase brand:
- AOV: ₹799
- Purchase frequency: 4x per year
- Gross margin: 45%
- 2-year retention: 40%
- LTV ≈ ₹575

LTV:CAC ratio is the key health metric:
- LTV:CAC ≥ 3× = healthy D2C
- LTV:CAC ≥ 5× = exceptional
- LTV:CAC < 2× = unsustainable without major changes

CAC Payback Period = CAC ÷ (CM1 per order × purchase frequency per month)
- Payback < 6 months = strong
- Payback 6–12 months = acceptable
- Payback > 18 months = requires rethink of channel or COGS

Frequently asked questions

What is CM1 in D2C?↓

CM1 (Contribution Margin 1) is revenue minus variable per-order costs: COGS, platform fees, fulfilment, and returns. It measures the profit per order before marketing. For Indian D2C brands, a CM1 of 25–40% is healthy.

What is a good LTV:CAC ratio for an Indian D2C brand?↓

An LTV:CAC ratio of 3× or above is considered healthy for Indian D2C brands. For FMCG/beauty categories with natural repeat purchase, 4–6× is achievable. Below 2× the model is likely unsustainable at scale without either reducing CAC or improving retention.

How is D2C unit economics different for Amazon vs own website?↓

On Amazon, you pay 18% referral fee but get built-in traffic and trust — lower CAC but lower CM1. On your own website, you keep margin but pay entirely for customer acquisition. A healthy D2C brand typically balances both: Amazon/Nykaa for discovery, own website for repeat purchase. The optimal mix depends on your category's organic search volume and repeat purchase rate.

Put this into practice