What is contribution margin?
Contribution margin is the money left from sales after you subtract variable costs, the costs that rise and fall with each sale. It shows how much is available to cover fixed costs and produce profit.
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How to calculate contribution margin
Subtract your variable costs from your revenue.
Why contribution margin matters
It shows what each sale really adds to the business. Variable costs often include product costs, shipping, payment fees, and sales commissions.
For marketers, it's a better basis than revenue for judging ad spend. You can only afford to pay for an order with the money that order leaves behind.
Contribution margin versus gross margin
Gross margin subtracts only the direct cost of making or buying the product. Contribution margin goes further and also subtracts other variable costs, such as shipping and payment fees.
Because of this, contribution margin is usually lower, and it gives a more careful base for setting break-even ROAS and target CPA.
As a ratio
You can express it as a percentage by dividing the result by revenue. In the example above, $40,000 on $100,000 of revenue is a 40% contribution margin.
Disclaimer
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Common questions
How do you calculate contribution margin?
Subtract variable costs from revenue. For example, $100,000 of revenue less $60,000 of variable costs leaves a contribution margin of $40,000.
What counts as a variable cost?
Variable costs change with sales volume. Examples include materials, packaging, shipping, payment processing fees, and commissions. Rent and salaries are usually fixed.
Is contribution margin the same as profit?
No. Contribution margin comes before fixed costs such as rent, salaries, and software. Profit is what remains after those are paid too.
Should ad spend count as a variable cost?
It depends on the question. To set how much you can spend on ads, measure contribution margin before ad spend. To judge a campaign's profit, subtract ad spend afterward.
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