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Join early accessContribution margin
What each sale contributes after the costs that scale with volume.
Contribution margin is revenue minus all variable costs — COGS, shipping, fees, discounts, returns and ads — expressed as a value or a percentage. It's what's left to cover fixed costs and profit. More honest than gross margin because it includes the costs that actually scale with each order.
In practice
Contribution margin is the number almost every other decision quietly depends on. Your break-even ROAS is one divided by it. Your break-even CPA is it expressed in dollars. Whether a discount is affordable, whether a product deserves ad budget, whether free shipping is generosity or self-harm — all of it resolves to how much of each sale survives the costs that scale with volume.
The usual mistake is treating it as gross margin with a different name. Gross margin typically stops at product cost; contribution keeps going through payment fees, marketplace commission, pick and pack, shipping, and the returns you know are coming. Those extras routinely take another 10–20 points off, which is how a product that looks healthy at the gross line turns out to be funding its own advertising badly.
Formula
Contribution margin = (Revenue − variable costs) ÷ Revenue × 100
Example: $100,000 − $71,900 variable costs = $28,100 (28.1%).
What a good result depends on
It should comfortably cover your fixed costs at your sales volume.
Common mistakes
- Treating fixed costs (rent, salaries) as variable.
- Reading a healthy gross margin as a healthy contribution margin.
Questions people ask
- How is contribution margin different from gross margin?
- Gross margin subtracts the cost of goods. Contribution margin subtracts every variable cost — goods plus fees, shipping, packaging and returns — so it's always the lower and more decision-useful of the two.
- Do fixed costs belong in it?
- No. Rent, salaries and software don't change when you sell one more unit, so they sit below the contribution line. Contribution is what's left to pay them with — which is exactly why it's the right input for ad targets.
- Should returns come out of it?
- Yes, at your realistic rate. A 10% return rate on a product with shipping both ways can move contribution several points, and ad targets built without it will be too generous for the whole category.