Contribution margin is the revenue remaining after subtracting all variable costs directly associated with producing and selling a product. It is calculated as:
Contribution Margin = Revenue - Variable Costs
Variable costs include cost of goods sold (COGS), variable fulfillment costs (packaging, pick-and-pack fees, shipping), payment processing fees, and variable marketing costs (commissions, affiliate fees). Fixed costs - rent, salaries, software subscriptions - are excluded because they do not change with each unit sold.
Contribution margin is more actionable than gross margin for per-order profitability analysis. A product with a 65% gross margin but $15 in variable fulfillment costs on a $50 item has a contribution margin of only 35% per order - enough to cover fixed costs only if order volume is sufficient. Understanding contribution margin at the SKU level is essential for pricing decisions, promotional strategy, and evaluating whether a paid channel is generating profitable orders.
For Shopify brands, contribution margin per order - sometimes called contribution margin 1 (CM1) - is the metric that determines whether a paid advertising campaign is actually profitable. A campaign generating a 4x ROAS on a product with 30% contribution margin may not be profitable after accounting for all variable costs. A campaign generating a 2.5x ROAS on a 65% contribution margin product almost certainly is. This is why contribution margin should sit alongside gross profit margin and MER as the three core profitability metrics any scaling Shopify brand tracks.
Shopify's native reporting doesn't break out contribution margin at the SKU or campaign level by default — variable fulfillment costs, payment fees, and COGS usually live in separate systems that need to be joined to order data before the number means anything. Building that reporting layer, alongside the cohort and MER views this metric depends on, is core to Shopify analytics and reporting work. For brands that also need the underlying cost and inventory data cleaned up before it can even be joined — not just the dashboards on top — that's more of an ecommerce data and analytics problem, starting further upstream.
Contribution margin only tells the full profitability story alongside MER, and this breakdown of ecommerce MER covers how to calculate it and read it next to ROAS.
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