Contribution margin = revenue - variable costs (COGS, shipping, fees and, after ads, ad spend)Contribution margin is revenue minus variable costs, the costs that rise with every order. In e-commerce those are the product (COGS), shipping and fulfillment, payment and platform fees, packaging and, if you count it per order, advertising.
Stores often look at it at two levels. Before ads, it tells you how much you can spend to win a sale, and it is the basis of break-even ROAS. After ads, it tells you what each order really leaves.
It is more useful than gross margin for daily decisions, because it includes the costs that make a product profitable or not in practice. A product with a 70% gross margin but heavy shipping costs can contribute less than one with a 55% margin that ships cheaply.
- Track it per product, not only for the whole store.
- Raise it with bundles and a higher AOV, which spread shipping and ad costs over more revenue.
- Watch returns: refunds and return shipping are variable costs too.
Common mistakes: forgetting payment fees and returns, and treating fixed costs such as apps or salaries as variable. Those belong further down, in net profit.