Contribution Margin
What a sale actually contributes to the business after COGS, shipping, platform fees, and ad cost are all subtracted.
Formula
Contribution Margin = Revenue - COGS - Shipping - Fees - Ad Cost per Order
Contribution margin is the number most dashboards get wrong. It starts with revenue and subtracts COGS, outbound shipping cost, Shopify transaction fees, payment processing fees (Stripe, PayPal), and the ad cost attributed to that order.
A product selling for $100 with $30 COGS, $8 shipping, $3 in fees, and $20 in ad cost has a contribution margin of $39 - or 39%. That $39 is what actually goes toward overhead and profit.
Contribution margin can be negative. If your ad cost per order is high and your margins are thin, you can run a campaign that grows revenue but shrinks profit. Tracking it per SKU, per channel, and per campaign is what prevents this.
Contribution margin is the correct denominator for break-even ROAS. Many brands calculate break-even ROAS using gross margin, which overstates how efficient their ads need to be because it ignores shipping and fees.
How do you calculate contribution margin?
Start with revenue and subtract COGS, outbound shipping cost, Shopify transaction and payment processing fees, and the ad cost attributed to that order. A product selling for $100 with $30 COGS, $8 shipping, $3 in fees, and $20 in ad cost has a contribution margin of $39, or 39%.
Can contribution margin be negative?
Yes. If your ad cost per order is high and your margins are thin, a campaign can grow revenue while it shrinks profit. Tracking contribution margin per SKU, per channel, and per campaign is what catches this before it drains the business.
Should break-even ROAS use gross margin or contribution margin?
Contribution margin is the correct denominator. Many brands calculate break-even ROAS using gross margin, which overstates how efficient their ads need to be because it ignores shipping and fees.
Related terms
Cost of Goods Sold · Gross Margin · Break-Even ROAS · Return on Ad Spend · Marketing Efficiency Ratio