What is left from a sale after all the costs that rise and fall with each sale, such as product cost, shipping, packaging and payment fees. It is the money that goes towards fixed costs and profit.
Formula
Contribution margin = selling price − variable costs. Contribution margin ratio = contribution margin ÷ selling price
Example
On a ₹2,000 online order, Meera pays ₹600 for the clothes, ₹100 for shipping and packaging and ₹40 in payment fees (2%). Her contribution margin is ₹2,000 − ₹740 = ₹1,260, or 63%.
How you'll hear it
“Gross margin is 70%, but contribution margin is 63% once shipping and gateway fees come off, so our breakeven ROAS is higher than we thought.”
What it helps you decide
Your true breakeven ROAS, which products to advertise, whether to offer free shipping or cash on delivery, and how much discount you can afford.
Where people misread it
People use gross margin to set breakeven ROAS and forget shipping, packaging, payment fees and returns. The breakeven they set is too low and they keep campaigns running that lose money on every order.
The story
Meera's ROAS calculation used her 70% gross margin. It left out the costs her online orders carry that walk-in sales do not.
| Selling price | ₹2,000 |
| Clothes (30%) | −₹600 |
| Shipping and packaging | −₹100 |
| Payment gateway fee (2%) | −₹40 |
| Contribution margin | ₹1,260 |
|---|---|
| Ad cost per order (CPA) | −₹500 |
| Left after ads | +₹760 |
Gross margin said ₹1,400 per order. The real contribution is ₹1,260, a 63% margin. Her simple breakeven ROAS rises from 1 ÷ 0.70 = 1.43x to 1 ÷ 0.63 = 1.59x.
Across 200 orders, each order leaves ₹140 less than she thought. That is ₹28,000 a month. The −₹60,000 month in her ROAS story is really −₹88,000 once these costs are counted.
This changes decisions. A free-shipping offer, a 10% discount or a switch to cash on delivery all come straight out of the ₹1,260. Work out the contribution margin first, then set your breakeven ROAS from it.
All figures are illustrative.
Work out contribution margin per order
The example's numbers are filled in. Replace them with yours.
Each order contributes towards fixed costs. Use the breakeven ROAS shown here, not 1 ÷ gross margin.
Don't confuse it with
- Gross margin: takes off only the cost of the product.
- Unit economics: the full per-order picture, which also subtracts the ad cost per order.
In India: Cash-on-delivery orders often carry an extra courier fee for collecting cash, and undelivered COD orders cost two-way shipping. Include both when you work out contribution margin for COD.
Related terms
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