Contribution margin
Contribution margin is the revenue left from a sale after every cost that moves with that sale is removed: landed cost of goods, fulfilment and shipping, payment fees and variable marketing. It is calculated as revenue minus variable costs, and ecommerce operators use it to judge whether each additional order, campaign or customer actually makes money.
| Variable | What it covers |
|---|---|
| Revenue | Net revenue for the order or period - gross sales minus discounts, returns and refunds. |
| Variable costs | Every cost that moves with the order: landed COGS, pick-pack and outbound shipping, payment and transaction fees, and variable marketing. |
In practice the subtraction runs as a step-down: CM1 removes landed COGS, CM2 removes fulfilment, shipping and payment fees, and CM3 removes variable marketing. Three rungs, three decisions: sourcing, operations, acquisition.
Worked example
Example numbers - the same A$120 order stepped down on The Math. An order that looks 58% profitable at gross margin contributes 23% once every variable cost is out.
What is a good contribution margin?
There is no universal good number. Contribution margin is set by your margin structure: the category you sell (consumables, apparel and electronics carry structurally different COGS and return rates), your average order value against per-order costs like shipping, how deep you measure (CM1, CM2 or CM3), and how much of your marketing truly scales with orders.
For spread rather than a target: Finaloop’s aggregated dataset of hundreds of 7-8 figure US brands (2023-2025) put the median brand contribution margin near 25%, with a quartile spread of 3% to 56%. Same revenue, wildly different keep. The useful move is to compute your own floor with the free contribution margin calculator - The Math shows every formula on the way down.
Contribution margin vs related metrics
| Metric | What comes out of revenue | The question it answers |
|---|---|---|
| Gross margin | COGS only. | Can the product carry its cost? |
| CM1 | Landed COGS only - the first rung of the step-down. | The same question, computed on true landed cost. |
| Net margin | Every cost, fixed overheads included. | Does the whole business make money? |
| Unit economics | Not one subtraction - the whole per-order P&L. | The discipline contribution margin sits inside. |
Common mistakes
- Stopping at gross margin. Shipping, pick-pack, payment fees and returns all move with the order; leave them in the number and it is not contribution.
- Using supplier cost instead of landed COGS. Freight-in and duty are real product cost; skipping them flatters every margin downstream.
- Only reading the blended average. A healthy store-wide number can hide loss-making SKUs and discount-heavy segments; contribution margin earns its keep per order, SKU and customer.
- Computing on gross revenue. Discounts, returns and refunds come off revenue before any cost is subtracted.
- Judging ad spend against revenue. The ad dollar spends from the margin pool, so breakeven ROAS is 1 ÷ contribution margin before marketing (CM2), not a revenue multiple.
Contribution margin FAQ
Related
Blufire S2 Unit Economics computes true contribution margin on every order, customer and SKU in the Profitability Cube and the CM waterfall & bridge. The Math teaches the full step-down free.
Updated July 2026