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Gross Margin vs Contribution Margin vs Net Margin
“Margin” gets used as if it means one thing. It doesn't. Gross, contribution and net margin measure different things and answer different questions — and using the wrong one leads to bad calls, like scaling a product that loses money on every order.
Here's what each margin includes, how to calculate it, and when to reach for it.
Contribution Margin Calculator
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Revenue and every variable cost for the period.
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Cost of goods
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Contribution margin
$28,100.0028.1%
Profit / order
$14.05
Break-even ad spend
$46,100.00
contribution before adsGross margin — is the product viable?
Gross margin = (Revenue − COGS) ÷ Revenue. It strips out only the cost of the goods themselves. It sets the ceiling on profitability and tells you whether a product is fundamentally worth selling. But it ignores fees, shipping, discounts and ads — so a healthy gross margin can still hide a money-losing product.
Contribution margin — does selling more help?
Contribution margin = (Revenue − all variable costs) ÷ Revenue, where variable costs include COGS plus shipping, payment and marketplace fees, discounts, returns and ads. It's what each sale contributes toward fixed costs and profit. This is the number for product and ad decisions: if contribution margin is negative, every extra sale loses money.
It also drives your break-even ROAS (1 ÷ contribution margin) and break-even CPA (contribution per order).
Net margin — does the business make money?
Net margin = Net profit ÷ Revenue, after everything — variable and fixed costs (rent, salaries, software). It's the true bottom line. Use it to judge the whole business, not individual products, because fixed costs are shared across everything you sell.
Which margin should you use?
Pricing a product: start with gross margin, then check contribution. Deciding whether to scale a product or campaign: contribution margin. Judging the health of the business: net margin. Report all three on a profit dashboard so you never confuse them.
Frequently asked questions
Is contribution margin the same as gross margin?
No. Gross margin only subtracts cost of goods; contribution margin subtracts all variable costs (fees, shipping, discounts, returns, ads). Contribution is the truer read on whether volume pays off.
Which margin matters most for ads?
Contribution margin — it sets your break-even ROAS and break-even CPA, the thresholds your campaigns must beat to profit.
What's a good contribution margin?
Often 20–40% for e-commerce, but the real test is whether it comfortably covers your fixed costs at your sales volume.
Track this on a live dashboard
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Keep reading
The Complete Guide to E-commerce Profitability
Revenue is vanity; profit is sanity. Walk the profit ladder — gross, contribution and net — learn which costs belong where, how discounts, shipping and returns bite, and how to find the numbers that tell you if you're actually making money.
How to Calculate Profit Margin (Formula & Examples)
Profit margin is the share of each sale you keep as profit. Learn the profit margin formula, how it differs from markup, and what a healthy margin looks like — then run your own numbers.
How to Calculate Break-even CPA
Break-even CPA is the most you can pay to win an order before it stops making money. Learn the formula, a worked example, and how to hold your Meta and Google CPA against it.