Contribution margin is the most important number most sellers can't state off the top of their head. It's what remains from a sale after every variable cost — the money available to pay for advertising, cover fixed overhead, and become profit. Get it right and your ad math, pricing, and cash decisions all fall into place.
The formula
Contribution margin (in dollars) = selling price − total variable cost per unit. As a percentage, divide that by the selling price. Variable costs are the ones that occur with each sale: product/COGS, payment processing fees, pick-pack and fulfillment, shipping, and expected returns or chargebacks.
The costs sellers forget
Three costs quietly wreck margin math: payment fees (roughly 3% on every order), shipping (especially with 'free shipping' baked into price), and returns (a 5% return rate on a physical product is a real cost). Leave these out and you'll believe a product is far more profitable than it is.
Why it drives everything
Contribution margin sets your break-even ROAS (1 ÷ margin) and your maximum customer acquisition cost. For a one-time purchase, your max CAC is roughly the contribution margin per order — spend more to acquire a customer and you lose money on the first sale. With repeat purchases, lifetime value lets you afford more.
Compute it once, correctly
The Margin & Break-Even ROAS Calculator forces every variable cost into the calculation so your contribution margin — and everything built on it — is honest.
Open the free Margin & Break-Even ROAS Calculator →
Frequently asked questions
What's the difference between contribution margin and gross margin?
Gross margin subtracts only COGS. Contribution margin subtracts all variable costs — COGS plus fees, shipping, and returns — so it better reflects the money actually available for ads, overhead, and profit.
What is a good contribution margin for e-commerce?
Many healthy DTC products run 30–50% contribution margin after all variable costs. Below ~30% it becomes hard to afford paid acquisition profitably.
How does contribution margin set max CAC?
For a single purchase, your maximum customer acquisition cost is about the contribution margin per order. Repeat-purchase businesses can afford a higher CAC based on customer lifetime value.