Ecommerce Profitability

Contribution Margin for Ecommerce

Contribution margin is the money an order leaves after variable costs and before fixed overhead. It is the bridge between product economics, advertising ceilings and store-level break-even.

Last reviewed Calculation methodology

Contribution margin formula

Contribution = Revenue − Variable costs Contribution margin % = Contribution ÷ Revenue × 100

Which costs belong in “variable” depends on the question. For ecommerce unit economics, COGS, seller-paid fulfilment, transaction fees and other per-order costs belong there. If you are calculating contribution before advertising, acquisition cost is deliberately held out so the result tells you how much room exists for CPA.

Worked example

On the example $80.00 order, non-ad variable costs are $40.70. That leaves $39.30 contribution before advertising, or a 49.1% contribution margin. That same $39.30 is the order's maximum break-even CPA.

Contribution margin vs gross margin

Gross margin often stops after COGS. Contribution margin goes further and removes the variable costs required to fulfil and process an order. That makes contribution more useful for deciding whether additional sales or additional ad spend help the business.

Contribution margin and ROAS

Break-even ROAS is just another view of the same economics. Divide revenue by the contribution available for advertising and you get the minimum return paid acquisition needs to avoid consuming the entire contribution. See What Is Break-Even ROAS?.

Contribution margin and store break-even

Once acquisition is included in the variable cost stack, contribution per order can be used to cover monthly overhead. Divide fixed monthly costs by contribution per order to find store-level break-even volume.

Frequently asked questions

Is contribution margin the same as net profit?

No. Contribution is before fixed overhead. Net business profit also has to cover salaries, subscriptions, rent, professional fees and other fixed or semi-fixed costs.

Should advertising be included?

Include it when measuring final contribution after acquisition. Exclude it when the purpose is to find the maximum CPA or break-even ROAS available to advertising.

Can contribution margin be negative?

Yes. A negative contribution means every additional order loses money before fixed costs, so scaling volume makes the loss larger unless economics change.

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