Contribution Margin 2 (CM2) measures net profit after deducting both landed cost of goods sold and direct customer acquisition costs (CAC). MeritSKU evaluates every product across a 9-cell stress-test matrix that models simultaneous advertising shocks and price compression.
1. Contribution Margin 2 (CM2) Definition
Formula: CM2 = Retail Price - Landed COGS - Customer Acquisition Cost (CAC).
While many brands appear profitable at CM1 (gross margin), high ad auction volatility frequently causes CM2 to turn negative in Q4 or during competitive bidding wars.
2. The 3x3 Shock Matrix Grid
MeritSKU simulates three price states (Baseline, -10% Promo, +10% Premium) against three CAC states (Baseline, +10% CPM Creep, +20% Auction Shock):
| Price Scenario | Baseline CAC ($15.00) | +10% CAC ($16.50) | +20% CAC ($18.00) |
|---|---|---|---|
| +10% Premium ($38.49) | +$8.51 (22.1% CM2) | +$7.01 (18.2% CM2) | +$5.51 (14.3% CM2) |
| Baseline Price ($34.99) | +$5.01 (14.3% CM2) | +$3.51 (10.0% CM2) | +$2.01 (5.7% CM2) |
| -10% Discount ($31.49) | +$1.51 (4.8% CM2) | +$0.01 (0.0% CM2) | -$1.49 (-4.7% CM2 - LOSS) |
3. Margin Fragility & Risk Index
If any single cell in the 9-cell matrix turns negative, the product receives a "Margin Fragile" badge, warning operators that discounting or ad bid escalation will immediately destroy cash flow.
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