Contribution margin

What is contribution margin?

Contribution margin is the sales price minus the variable costs — the amount a sold item leaves behind to cover fixed costs and to generate profit. Variable costs scale with sales and, in an online store, typically include cost of goods sold (COGS), payment processor fees, shipping, and pick-and-pack. You can express it per order or as a contribution margin ratio, dividing contribution margin by revenue and multiplying by 100.

Why does contribution margin matter?

Revenue alone says nothing about whether you make money. Two products at the same price can have very different contribution margins once shipping and fees are subtracted. Knowing the margin per product lets you cap what you can pay to acquire a customer and prioritize the items and campaigns that actually add to the bottom line. Contribution margin — not revenue — is also what underpins POAS, unlike ROAS, which looks only at revenue.

Common use cases

• Pricing: check whether a price or discount code still leaves a positive contribution margin.
• Ad ceiling: find how much you can spend per order before customer acquisition cost eats the whole margin.
• Assortment analysis: identify products with low or negative contribution margin that drag earnings down.
• Break-even: calculate how many orders are needed before total contribution margin covers fixed costs.
• Free-shipping threshold: find the order value where a higher average order value absorbs the shipping cost.

Shopify perspective

Shopify has a Cost per item field on each variant that powers the margin and profit columns in reports. But that field holds only COGS — not payment fees, shipping, or fulfillment — so Shopify does not show true contribution margin out of the box. To calculate it accurately, either subtract fees and shipping manually or use a profitability app that combines Cost per item, transaction fees, and shipping into a single per-order figure.