What is contribution margin?
Contribution margin is revenue minus variable costs: what a sale leaves after the costs that grow with each order, such as the product, shipping, card fees and packaging. A $50 order that costs $30 to fill contributes $20, a 40% contribution margin, toward fixed costs like rent and wages, then profit.
How do you calculate contribution margin?
Contribution margin = revenue minus variable costs. Revenue is net sales, after discounts and refunds, plus any shipping you charge. Take that $50 order, shipped free: $20.00 for the product, $6.55 for the shipping label, a $1.75 card fee and $1.70 of packaging. Those $30.00 of variable costs leave $20.00. Fixed costs stay out: they cost the same at 10 orders or 1,000.
Profit-tracking apps often subtract ad spend later and call the result CM2 or CM3.
What is the contribution margin ratio?
Contribution margin ratio = contribution margin ÷ revenue × 100. For the $50 order, $20 ÷ $50 = 0.40, or 40%: each sales dollar leaves 40 cents for fixed costs and profit. The same ratio sets your break-even ROAS: 1 ÷ 0.40 = 2.5, so each $1 of ads needs $2.50 of sales.
What is contribution margin per unit?
Contribution margin per unit = price per unit minus variable cost per unit. For the one-item order, $50 minus $30 = $20. With $3,500 of fixed costs a month, you break even at $3,500 ÷ $20 = 175 sales. A second item usually shares the label and box, so a bigger average order value lifts each order's contribution.
What is a contribution margin income statement?
A contribution margin income statement sorts costs by how they behave: variable costs above the contribution margin line, fixed costs below.
| Line | One month |
|---|---|
| Sales (300 orders at $50) | $15,000 |
| Minus variable costs (300 × $30) | $9,000 |
| Contribution margin (300 × $20) | $6,000 |
| Minus fixed costs (rent, wages, flat monthly fees) | $3,500 |
| Operating income | $2,500 |
Profit matches the usual income statement. This layout shows what 30 more orders are worth: $600, because fixed costs stay put.
Contribution margin vs gross margin
Gross margin takes out only product cost, so the same order shows 60% gross margin and 40% contribution margin.
Shopify's profit reports work out gross margin from the "Cost per item" you enter on each product. Open Reports in Analytics and choose Profit Margin from the Category filter. "Profit margin by order" also lists the shipping, duties and import taxes your store paid. Subtract card fees and packaging yourself.
Single-item orders, with Sledge
Sledge does not calculate contribution margin or read your product costs. With 50 or more orders in the last 30 days, at least seven in ten holding one product, the Signals tab in Sledge Analytics shows "Most orders have one item" and a button to create a bundle. On a paid plan, Growth Intelligence sums its suggested fixes into one total in dollars, labeled "Est. potential": a sales estimate, not a margin.
