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What is contribution margin?

Contribution margin is what's left of revenue after variable costs like product, shipping, fees and ad spend: the money that pays for fixed costs and profit.

Formula

Contribution margin = revenue − variable costs

A $65 order with $20 of product, $9 of shipping, $1.95 of fees and $18 of ads leaves $16.05, a 24.7% contribution margin.

Work out yours with the contribution margin calculator.

A real store example

Kiki Milk Subscribe & Save 30% page: over 10 Meta ads linked here.

A 30% subscription discount comes straight out of each order's contribution margin, before shipping and fees. It pays off only if subscribers reorder enough times to make up for the smaller margin on each order.

Open the pageSee their ads

How to improve contribution margin on your store

  1. Raise the order value

    Shipping and fees barely change when an order gets bigger, so bundles add margin almost dollar for dollar.

  2. Lower the ad cost per order

    A page that converts better cuts the ad cost on every order it wins.

  3. Price discounts against margin

    A 20% discount on a 50% margin product gives away 40% of the profit. Check before you run it.

Ask Replo: "email me contribution margin per order every morning".

Report my margin

Contribution margin questions

Is contribution margin the same as gross margin?
No. Gross margin subtracts only the product cost. Contribution margin also subtracts shipping, fees and the ad cost of each order, so it shows what an order really leaves to pay the business.
What is a good contribution margin?
Positive is the first test. Beyond that, it needs to cover fixed costs at the volume you can sell: orders needed = fixed costs ÷ contribution margin per order.
Should contribution margin include ad spend?
For paid orders, yes, because ads are a cost of winning each one. Many stores track contribution margin before and after ads, to see what organic orders leave compared with paid ones.

Related terms

Browse the glossary

ROAS

ROAS (return on ad spend) is the revenue an ad campaign brings in for every dollar spent on it: revenue from ads divided by ad spend.

AOV

AOV (average order value) is the average amount a customer spends per order: revenue divided by number of orders.

CAC

CAC (customer acquisition cost) is the total sales and marketing spend it takes to win one new customer.

GMV

GMV (gross merchandise value) is the total value of goods sold through a store or marketplace before fees, returns and discounts.

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