What is Contribution Margin?

Contribution Margin is the amount of revenue remaining after subtracting all variable costs associated with a sale. It represents the true profit contribution of each order before fixed costs (rent, salaries, software) are considered.

Why It Matters

Contribution margin tells you whether each sale actually makes money. A brand can have millions in revenue but negative contribution margin if variable costs eat up every dollar.

How to Calculate It

Contribution Margin = Revenue − COGS − Shipping − Transaction Fees − Returns Cost − Variable Marketing Costs

Contribution Margin Ratio = Contribution Margin ÷ Revenue × 100

What to Include as Variable Costs

Cost of Goods Sold (COGS)
Shipping and fulfillment
Payment processing fees (Stripe, Shopify Payments)
Returns and exchanges costs
Packaging and inserts
Variable customer acquisition costs

Contribution Margin Levels

Many brands track contribution margin at multiple levels:

CM1: Revenue minus COGS only (Gross Margin)
CM2: CM1 minus fulfillment and shipping
CM3: CM2 minus marketing costs
CM4: CM3 minus overhead (fully loaded P&L)