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Contribution margin

Contribution margin is the revenue left after the cost of goods and every other cost that comes with each order, and it is what pays for fixed costs and profit.

How it works

Margin takes out only the cost of goods. Contribution margin also takes out every cost that grows with the number of orders: delivery the store pays for, payment fees, packaging and returns. Rent and salaries stay out: one more order doesn’t change them.

Set break-even ROAS from this margin: a line built on the cost of goods alone misses costs every order carries. An ad account doesn’t see delivery, fees or packaging, so the store counts them in its unit economics. See contribution margin vs gross margin.

Formula

Revenue − cost of goods − other costs that grow with orders

Ways to calculate

  • Before advertising — revenue minus variable costs, as the Corporate Finance Institute (CFI) defines it (Contribution Margin). It sets break-even ROAS.
  • After advertising — ad spend is subtracted too, which CFI calls contribution margin after marketing. It shows whether orders also paid for the ads.

Example

Example store, not client data.

The tableware shop: revenue 180,000, gross profit 63,000 (35%). Delivery costs it 7,200 (4% of revenue), payment fees 3,600 (2%) and packaging 1,800 (1%). Contribution margin = 63,000 − 12,600 = 50,400, or 28%.

Break-even ROAS is 1 ÷ 0.28 ≈ 3.57 instead of 1 ÷ 0.35 ≈ 2.86. After 40,000 of ad spend, 10,400 is left for fixed costs and profit.

Not to be confused with

  • Gross profit — revenue minus the cost of goods only. Google Ads can report it when conversions carry cart data and the Merchant Center feed carries the cost of goods sold.

Right and wrong readings

  • Wrong: “Our margin is 35%, so ads pay off above a ROAS of 2.86.” Right: at a contribution margin of 28% the line is 3.57, so between 2.86 and 3.57 each order from ads loses money.
  • Wrong: “A ‘gross profit margin’ calculator leaves out delivery.” Right: Shopify’s break-even ROAS calculator subtracts delivery, payment fees and pick-and-pack under that name. Check the costs, not the label.

Sources