The Challenges of Running a D2C Business
- Jan 24, 2025
- 3 min read
Updated: Feb 25, 2025
Running a Direct-to-Consumer (D2C) business is difficult. Tasks include building brand loyalty, managing complex supply chains, relying on third-party platforms…the list goes on…Whilst these are challenges for any D2C business globally, they are particularly severe in the UK due to macroeconomic conditions.
Amongst these challenges, one financial metric determines long-term survival: Contribution Margin 2 (CM2). CM2 represents the profit left after accounting for both core operating costs and marketing spend, making it the most important indicator of a D2C company’s financial health. In this article, we will discuss how to calculate it and what makes it so important.
The UK’s economic challenges are making D2C more difficult
Several macroeconomic factors are influencing consumer behaviour in the UK in conflicting ways:
Inflation: The UK’s inflation rate has fallen from 9.6% in October 2022 to 3.5% in November 2024, potentially signalling reduced consumer spending. [1]
Interest Rates: The Bank of England increased rates to 5.25% (Aug 2023–Jul 2024) to curb inflation but has since lowered them to 4.75% as of December 2024. This reduction may encourage big-ticket purchases, with further rate changes also expected in February 2025. [2]
Labour Costs: The new Labour government has announced a 6.7% increase in the National Living Wage to £12.21 (effective April 2025), which could drive wage-push inflation and increase costs for businesses. [3]
With these mixed signals, many D2C founders are hesitant about making aggressive financial decisions. But instead of focusing solely on external conditions, businesses should prioritise internal financial levers – especially CM2 – to ensure resilience.
A good starting point is analysing their Profit & Loss (P&L) statement to understand the most important cost drivers.
Understanding the key cost drivers in a D2C business
In general, successful D2C businesses operate with a high gross margin. However, below the gross margin, we see three key cost areas that significantly impact profitability:
Packaging – Packaging serves multiple functions: product protection, enhanced unboxing experiences, and communicating brand values such as sustainability or luxury. Many brands now use recyclable and biodegradable materials and incorporate branding elements to improve engagement.
Logistics – On-time delivery is critical for customer satisfaction. However, logistics is often outsourced to providers like Royal Mail, DPD, or Evri, which limits brand control. A well-optimised logistics strategy can set a D2C business apart.
Payments – Payments are essential for D2C operations, with common UK methods including Visa, Mastercard, AmEx, PayPal, and BNPL providers like Klarna. Costs vary by provider, volume, and method, with BNPL and credit cards typically incurring higher fees.
After deducting these costs, we arrive at Contribution Margin (CM) – the remaining funds available for customer acquisition and retention.
Why marketing is the largest – and most risky – expense
Marketing is the largest expense for most D2C businesses, typically, from experience, accounting anywhere from ~40+% of total revenue. The majority of this expenditure goes towards:
Paid social media advertising (Meta, TikTok, Snapchat)
Search engine marketing (Google Ads, SEO)
Email campaigns
Content marketing (blogs, videos)
Affiliate partnerships and marketplace collaborations
Marketing is crucial for customer acquisition and retention, but without careful management, it can erode profitability.
Once marketing spend is deducted from CM, we arrive at ‘CM less Marketing,’ also known as Contribution Margin 2 (CM2), the single most critical metric for a D2C business.
Why CM2 is the key metric
For any D2C company, a positive CM2 is essential for long-term sustainability. If CM2 is positive, the business retains enough margin after marketing costs to sustain operations, allowing it to reinvest in growth, scale efficiently, and improve customer retention without excessive cash burn. A positive CM2 also means that customer acquisition is profitable in the long run, making the business less reliant on continuous external funding.
If CM2 is negative, customer acquisition costs are too high relative to revenue, meaning that even though sales are happening, each new customer is acquired at a net loss. This often leads to a reliance on venture capital or external funding to keep the business afloat, making it difficult to achieve profitability without drastic cost-cutting measures.
This is the primary reason why most D2C businesses shut down – not because of product-market fit or competition, but because they fail to manage CM2 effectively.
In a future post, we will discuss how to optimise CM2, ensuring that a D2C business remains profitable despite macroeconomic uncertainty.
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