Contribution Margin

Contribution margin shows what each order actually leaves after every variable cost, so it is the clearest test of whether growth adds profit. A product can have a healthy gross margin and still lose money once shipping, fulfillment, payment fees, and ads come out. For example, an $80 order with $28 of COGS, $9 of shipping, $5 of fulfillment, $2.50 of payment fees, and $15 of marketing contributes $20.50, or about 26%. If shipping rises by $5, contribution margin falls by almost a quarter.

Contribution margin = revenue − variable costs

Per order, variable costs usually include COGS, shipping, fulfillment, payment fees, and marketing.

What is the difference between gross margin and contribution margin?

Gross margin subtracts only cost of goods sold from revenue. Contribution margin also subtracts other variable costs like shipping, fulfillment, payment fees, and often ad spend, so it is lower and closer to true per-order profit.

How do you calculate contribution margin per order?

Subtract all variable costs of the order from its revenue. $80 minus $59.50 of COGS, shipping, fulfillment, payment fees, and marketing leaves $20.50.

Should marketing be included in contribution margin?

Many ecommerce brands include ad spend per order because it rises with sales. Some report contribution margin before and after marketing to separate product economics from acquisition cost.

• Gross MarginRevenue left after product costs
• Cost per OrderCPOTotal cost to fulfill and ship one order
• Cost to ServeFull cost of serving a customer or channel
• Fulfillment Cost as Percent of RevenueShare of revenue spent on fulfillment
• Average Order ValueAOVAverage revenue per order