What contribution margin means
Contribution margin is the revenue remaining after variable costs directly associated with an order. It helps show how much each sale contributes toward fixed overhead and, after overhead is covered, operating profit.
Build the calculation
Start with revenue retained from the order. Subtract product cost, inbound freight allocated per unit, marketplace and payment fees, fulfilment, packaging, shipping subsidies, and advertising attributable to the order. Keep sales tax collected on behalf of tax authorities separate from revenue.
Contribution per order = net sales revenue − variable costs. Contribution margin percentage is contribution per order divided by net sales revenue, multiplied by 100.
Use it to compare products
A product with a higher selling price is not necessarily more attractive. Compare contribution dollars and contribution percentage across SKUs and channels. A high-volume product with thin contribution may be less resilient to returns, shipping increases or advertising costs.
What this calculation leaves out
Fixed costs such as software subscriptions, rent, insurance and salaries are not normally allocated into contribution margin unless you are deliberately calculating fully loaded profit. Track both measures rather than mixing them.
Use the product profit calculator to estimate the variable costs you know, then reconcile the result with actual payouts and invoices.
Worked example: contribution per order
Assume an order has $40.00 in net sales after discounts and refunds. Product cost is $10.00, inbound freight allocation is $1.00, marketplace and payment fees total $5.00, fulfilment and packaging are $7.00, and advertising allocated to the order is $3.00. Variable costs total $26.00, leaving $14.00 contribution. Contribution margin is $14 ÷ $40 = 35%.
If monthly fixed overhead is $280, the business needs 20 comparable orders at $14 contribution each to cover that overhead, before income taxes, financing costs or owner distributions. This is a simplified break-even illustration; actual orders may have different contribution amounts.
Use contribution dollars and percentage together
Contribution dollars help estimate how much a sale contributes toward fixed costs. Contribution percentage helps compare economics across different selling prices. A product with a higher percentage can still contribute fewer dollars per order, so use both measures alongside sales volume and return behavior.