The One Metric That Matters in Amazon vs DTC Profitability for E-commerce

Amazon Seller Metrics vs DTC: A Practical Profitability Analysis

For many e-commerce startups, the dashboard view is a mixed signal. Revenue from Amazon is climbing and direct-to-consumer (DTC) sales through Shopify are growing, yet cash in the bank feels perpetually tight. The top-line numbers look healthy, but they obscure a critical question: which channel is actually driving profit, and which is draining resources? Answering this requires moving beyond revenue and dissecting the true unit economics of each sale. This practical profitability analysis is not about building complex financial models. It is about gaining the directional clarity needed to make smarter decisions about inventory, marketing spend, and your overall e-commerce channel strategy, ensuring that growth translates to a healthier bottom line.

Foundational Understanding: The One Metric That Matters

To properly assess Amazon vs DTC channel profitability for ecommerce startups, we need a common language. That language is Contribution Margin (CM). Contribution Margin is the revenue left over from a sale after all the variable costs associated with that specific sale have been paid. These are costs that exist only if a sale happens, like product costs, payment processing, and shipping fees.

This is different from your fixed costs, which you pay regardless of sales volume, such as rent, salaries, and software subscriptions. Focusing on CM tells you how much cash each sale contributes toward paying for those fixed costs and, eventually, generating profit. It isolates the performance of the product and the channel, providing a clean metric for comparison. For a resource-constrained startup, understanding the contribution margin of each channel is the first and most critical step in managing cash flow. It moves the conversation from “How much did we sell?” to “How much did we actually make from what we sold?”

Step 1: Calculating Contribution Margin (CM1) for an E-commerce Margin Comparison

Our first step is to calculate CM1, which is the contribution margin on a single product sale before accounting for channel-specific advertising costs. This gives us the purest view of a channel’s inherent profitability. To do this, we need to break down the unique cost structure of a sale on Amazon versus a sale on your own DTC website, like one powered by Shopify. The difference is often surprising.

The Anatomy of an Amazon Sale

A sale on Amazon comes with a complex, and often underestimated, fee structure that directly impacts your margin. An analysis of your Amazon FBA costs reveals several key variable costs:

• Cost of Goods Sold (COGS): The direct cost of manufacturing or purchasing the product itself.
• Amazon Referral Fees: These are typically 8-15% of the total sale price, varying by product category. (Citation: Amazon Seller Central Documentation)
• FBA Fulfillment Fees: If you use Fulfillment by Amazon (FBA), these fees cover handling the order. Amazon FBA ‘pick and pack’ and weight-based handling fees often increase significantly in Q4.
• Storage Fees: Amazon FBA Storage Fees are charged per cubic foot per month. These costs can escalate with Amazon FBA long-term storage fees, which apply for items held over 365 days.
• Return Processing: Returns are not just a reversed sale. A 5% return rate on Amazon can reduce your true margin by an additional 1-2% due to return processing and disposal fees.

The Anatomy of a DTC Sale

A DTC sale has a more straightforward cost structure where you have greater control, but also greater responsibility. The primary variable costs for your direct to consumer sales analysis are:

• Cost of Goods Sold (COGS): The same as for the Amazon sale.
• Payment Processing Fees: For platforms like Stripe and Shopify Payments, these are typically 2.9% + $0.30 per transaction.
• Shipping and Fulfillment: This could be the cost from your third-party logistics (3PL) partner or your in-house picking, packing, and postage costs.
• Packaging: The cost of boxes, mailers, and any branded inserts.

Example: A Tale of Two Channels ($50 Product, $10 COGS)

Let’s compare the CM1 for a hypothetical $50 product with a $10 COGS on both channels. This direct e-commerce margin comparison illustrates the cash left from a single transaction.

Amazon FBA Sale Breakdown

For a sale on Amazon, the calculation might look like this:

• Sale Price: $50.00
• Less COGS: ($10.00)
• Less Amazon Referral Fee (15%): ($7.50)
• Less FBA Fulfillment Fee: ($5.50)

After total variable costs of $23.00, the CM1 per unit is $27.00, which represents a 54% CM1 Margin.

DTC (Shopify) Sale Breakdown

For a sale on your own site, the calculation is different:

• Sale Price: $50.00
• Less COGS: ($10.00)
• Less Payment Processing (2.9% + $0.30): ($1.75)
• Less 3PL Fulfillment Fee: ($6.00)
• Less Packaging Cost: ($0.50)

After total variable costs of $18.25, the CM1 per unit is $31.75, which represents a 63.5% CM1 Margin. In this scenario, the DTC channel delivers $4.75 more cash per sale before a single dollar is spent on marketing. This is a foundational insight for any sales channel profitability analysis.

Step 2: Allocating Shared Costs for a True Apples-to-Apples View (CM2)

Knowing your CM1 is a crucial first step, but it does not tell the whole story. To get a true profitability view, you must account for channel-specific marketing costs and allocate shared business expenses. This moves us from CM1 to Contribution Margin 2 (CM2), which represents channel profitability after these costs are factored in.

This is where many founders get stuck. The reality for most e-commerce startups is more pragmatic: use a simple, logical method like pro-rata allocation based on revenue. This approach provides the directional accuracy needed for strategic decisions without requiring a complex accounting setup.

Consider a startup with a $6,000 monthly marketing salary. In a month where the business generated $70,000 in revenue from Amazon and $30,000 from DTC (a 70/30 split), you would allocate the salary as follows:

• Amazon Allocation: $6,000 x 70% = $4,200
• DTC Allocation: $6,000 x 30% = $1,800

This logic can be applied to other shared overheads. By subtracting these allocated costs and any direct channel marketing spend (like Amazon PPC or Facebook Ads for DTC) from your total CM1 for each channel, you arrive at CM2. This metric gives you a much clearer answer to the question, “Which sales channel is truly driving profit?” For those using accounting software like QuickBooks or Xero, this can be modeled in a simple spreadsheet that pulls top-line numbers from your bookkeeping system.

Step 3: Looking Beyond the First Sale with LTV and Payback Period

A complete DTC vs marketplace selling analysis must look beyond the profitability of the first transaction. The long-term value of the customer relationship is a critical differentiator, directly impacting your e-commerce channel strategy. This involves two key online retail performance metrics: Customer Acquisition Cost (CAC) and Lifetime Value (LTV). The goal is to have a high LTV-to-CAC ratio and a short CAC Payback Period.

The Amazon LTV Reality

When you sell on Amazon, you are effectively renting access to their customer. You have minimal access to customer data, making it difficult to build a direct relationship, retarget them, or encourage repeat purchases. For most brands, the practical consequence tends to be that an Amazon customer’s LTV is often equal to the contribution margin of their first and only order. While Amazon can be a powerful customer acquisition engine, it is not designed to be a retention engine.

The DTC LTV Advantage

With a DTC channel, you own the customer relationship. You capture their email, track their purchase history, and can communicate with them directly. This is your most powerful tool for increasing LTV through tactics like email marketing, loyalty programs, and building a community that encourages repeat purchases. A slightly lower CM1 on a DTC sale can be strategically acceptable if it leads to a customer with an LTV that is two, three, or even ten times higher than a one-time Amazon buyer.

Practical Takeaways for Your E-commerce Channel Strategy

To move from theory to action, focus on these four steps to clarify your Amazon vs DTC channel profitability for ecommerce startups:

1. Calculate CM1: Use a spreadsheet to model the per-unit variable costs for your top-selling products on both Amazon and your DTC store. This will immediately highlight the true cash generated by each sale.
2. Estimate CM2: Allocate your shared costs, like marketing salaries and software, on a pro-rata basis using revenue share. Subtract these, along with direct marketing spend, to see which channel is profitable after all relevant costs are considered.
3. Define Channel Roles: Treat Amazon as a customer acquisition channel and your DTC store as your profit and retention engine. Let Amazon introduce new customers to your brand, then focus on creating a superior DTC experience to capture their long-term value.
4. Align Spend with Profitability: Use your CM2 insights to guide your budget. If a channel is unprofitable even after optimization, do not scale its marketing spend. Invest where you see a clear path to profitable growth and high LTV.

Final Thought: Gaining Clarity on Channel Profitability

This analysis is not an exercise in perfect accounting. It is a strategic framework for making informed, cash-conscious decisions. For busy founders using tools like Shopify, QuickBooks, and Xero, the goal is directional accuracy. By understanding the true contribution margin of each channel, both before and after shared costs, you can build a more resilient, profitable, and sustainable e-commerce business.

See the hub for more on acquisition and retention metrics.

Frequently Asked Questions

Q: Why is Contribution Margin a better metric than revenue for comparing channels?

A: Contribution Margin isolates the profitability of each sale by subtracting all variable costs. This shows how much cash each transaction generates to cover fixed costs and profit, offering a true apples-to-apples view of channel performance that top-line revenue can obscure.

Q: How can I estimate LTV for Amazon customers with limited data?

A: The practical consequence tends to be that an Amazon customer's LTV equals the contribution margin from their first and only order. Since Amazon limits direct communication and retargeting, it is safest to assume a customer's value is confined to that initial sale unless you have specific data showing otherwise.

Q: Is selling on a DTC channel always more profitable than Amazon?

A: Not always on the first sale. While our example shows a higher initial margin (CM1) for DTC, factors like high customer acquisition costs can make it less profitable upfront. The key advantage of DTC is owning the customer relationship, which leads to a much higher potential Lifetime Value (LTV).