Contribution margin

Contribution margin is the money left from sales after you subtract the costs that rise and fall with each order. What remains contributes to covering fixed costs, such as salaries, rent and software, and then to profit. For ecommerce brands that rely on paid ads, it is often a more useful measure of health than revenue or ROAS.

How to calculate it

Contribution margin = revenue − variable costs

Contribution margin ratio = contribution margin ÷ revenue

Which costs count as variable can differ by business. Typical variable costs for an online store include cost of goods, shipping and fulfilment, payment processing fees, packaging, returns and, for many brands, advertising spend.

Worked example (made-up numbers): a month brings $50,000 in revenue. Cost of goods is $15,000, shipping and fulfilment $6,000, payment fees $1,500 and ad spend $15,000, for $37,500 in variable costs. Contribution margin = $12,500, or 25% of revenue. Check your own numbers with the profit margin calculator.

Levels of contribution margin

Some teams split the measure into stages, for example one figure after product and fulfilment costs and another after marketing. Labels vary between companies, so define yours clearly.

Why it matters

• It shows whether growth is profitable, not just whether it is happening.
• It helps set break-even ROAS and target CPA.
• It reveals the true cost of discounts and free shipping offers.
• It allows comparison between products with different price points and margins.

A business can grow revenue while its contribution margin shrinks, which is a warning sign worth catching early.