Profitability
Contribution margin
Contribution margin is what each sale leaves over after every cost that rises with that sale, available to cover fixed costs and profit.
Contribution margin = (Revenue − Variable costs) ÷ Revenue
Worked example
| Order revenue | $100 |
| Cost of goods | $40 |
| Payment fees | $3 |
| Shipping | $8 |
| Ad spend per order | $19 |
($100 − $70) ÷ $100 = 30%
Why it matters
Gross margin can look healthy while every order loses money once fees, shipping and ads are counted. Contribution margin tells you whether growth makes money or spends it.
Common mistakes
Where it misleads
Leaving out payment fees, discounts or refunds, which are variable and often large.
Using platform-reported ad conversions instead of real revenue to allocate ad spend.
Including fixed costs like salaries, which belong below contribution margin.
Related terms
Keep reading
- Gross marginGross margin is the share of revenue left after paying the direct costs of delivering what you sold.
- Return on ad spend (ROAS)Return on ad spend is the revenue earned for every dollar spent on advertising.
- EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization: a measure of operating profit before financing, tax and non-cash charges.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.