What is Contribution Margin?
Contribution margin is revenue minus variable costs (COGS, shipping, payment fees, variable ops). It shows how much is left to cover fixed costs and profit.
Understanding Contribution Margin
Contribution margin is the backbone of unit economics because it isolates how much each sale contributes after variable costs. Use it to set CAC, ROAS, and promo thresholds by product or category rather than applying broad targets. CM varies by SKU based on COGS, shipping, payment fees, and variable ops, so read it where decisions happen. As fees change, contribution can erode even when revenue grows. Clear CM views prevent scaling unprofitable mixes.
Teams should calculate contribution margin consistently and refresh it on a schedule. Use CM% to compare across categories with different price points. Tie merchandising and promo strategy to CM so discount depth reflects true room to move. In catalog ads, prioritize high‑CM products in prospecting where costs are highest. Document assumptions—returns, shipping subsidies—so targets remain realistic.
Why Contribution Margin matters
Contribution margin matters because it determines sustainable acquisition targets and guides pricing strategy based on real unit economics. Clear CM views prevent scaling unprofitable product mixes by showing which SKUs have room for marketing spend and promotions. Tracking contribution margin by product or category ensures that growth decisions reflect true profitability rather than misleading top-line revenue.
- Profitability: Determines sustainable acquisition targets
- Pricing: Guides discount depth and sale windows
- Mix: Highlights which products to promote in catalog ads
How to Calculate Contribution Margin
- CM = Revenue − Variable Costs
- CM% = CM ÷ Revenue
- Track by SKU/product set for accuracy.
Key Takeaways
- Contribution margin is revenue minus variable costs; it shows what's left to cover fixed costs and profit.
- Use contribution margin to set sustainable CAC and ROAS targets by product category.
- High-margin products can support more aggressive acquisition spending than low-margin ones.
- Track contribution margin by channel and SKU to prioritize profitable growth.
