In one sentence
Contribution margin is what's left of an order after you pay for the product, shipping, payment fees and the marketing that won it, and it shows whether each sale actually makes your store money.
How to calculate contribution margin
Contribution margin = revenue minus the costs that rise with every order.
For a store, those costs usually are:
- Cost of goods sold
- Shipping and packaging
- Payment processing fees
- Marketing spend tied to the sale
Take a $60 order. The product cost $18, shipping and packing $9, payment fees $2, and ads $15. The contribution margin is $16, or about 27% of the order.
Contribution margin vs. gross margin
Gross margin stops after the product cost. Contribution margin keeps going until the order is delivered and paid for. Gross margin tells you if the price is right. Contribution margin tells you if the sale was worth making.
Why contribution margin matters for ecommerce brands
Revenue can grow while the business shrinks. If ads or free shipping eat more than the margin, every new order costs you money. Contribution margin catches that early.
It is also the honest number to set ad budgets against. A campaign with a strong ROAS can still lose money on low-margin products.
Contribution margin FAQs
What's a good contribution margin for an online store?
It depends on your category, price point and how much you spend to win a customer. The useful test is simpler: it should be positive on first orders you plan to scale, and clearly positive on repeat orders.
Can I see contribution margin in Shopify?
Partly. Shopify's profit reports use cost of goods when you enter a cost per item. Shipping, fees and ad spend usually need to be added in a spreadsheet or a profit tool.
Should marketing spend be included?
Yes, for the version you run the business on. Leaving ads out makes paid growth look free.
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