Contribution Margin
MetricContribution margin is revenue remaining after deducting all variable costs associated with producing, packaging, shipping, and processing an order.
What is Contribution margin, in plain English?
When an item sells, money immediately leaves your pocket for the product cost (COGS), shipping postage, packing boxes, and credit card swipe fees (2.9%). What is left over is your Contribution Margin — the exact money available to pay for advertising and business overhead.
How do you calculate Contribution margin?
Contribution Margin = Revenue − Variable Direct Costs
Contribution margin example
A customer buys sneakers for $100. Product cost is $40, shipping is $10, and payment fees are $3. Contribution margin is $100 − $53 = $47 (47%).
Common Contribution margin mistakes
Many marketers mistakenly optimize ads against Gross Margin instead of Contribution Margin, forgetting that shipping, warehousing pick-and-pack, and gateway fees eat directly into ad profitability.
What is a good Contribution margin?
There's no single target; what matters is that contribution margin stays positive after marketing. Calculate it per order as a percentage of revenue and use it to set ROAS targets: if contribution margin before ads is 40%, ad spend must stay under 40% of the revenue it drives — a breakeven ROAS of 2.5x.
Contribution margin FAQs
What is the difference between contribution margin and gross margin?
Gross margin subtracts only the cost of goods sold. Contribution margin also subtracts the other variable costs of fulfilling an order — shipping, packaging, pick-and-pack, payment gateway fees and expected returns. It is the money actually available to pay for advertising and fixed costs.
How do you calculate contribution margin per order?
Start with net revenue after discounts and taxes, then subtract product cost, shipping, packaging, payment fees and an allowance for returns. A $100 order with $40 product cost, $10 shipping, $3 fees and $5 expected returns leaves $42 — a 42% contribution margin.
What is contribution-margin ROAS?
Ad-attributed contribution margin divided by ad spend. Above 1.0, the ads paid for themselves out of real margin; below 1.0 they lost money, even if revenue ROAS looked healthy.
Last reviewed October 3, 2026.