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 fulfilment 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 fulfilment 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.
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