Contribution Margin

Contribution margin is the amount of revenue that remains after deducting all variable costs directly associated with fulfilling an order. It represents the portion of each sale that "contributes" to covering fixed costs and generating profit. For e-commerce brands, contribution margin is a more actionable metric than gross margin because it includes all variable costs, not just cost of goods sold.

The contribution margin calculation for an e-commerce order typically includes: Revenue (sale price after discounts) minus COGS (product cost), minus Shipping costs (outbound shipping, packaging materials), minus Payment processing fees (Stripe/PayPal fees, typically 2.9% + $0.30), minus Return costs (estimated return rate × reverse logistics cost), minus Platform fees (Shopify fees, marketplace commissions).

Tracking contribution margin by product, channel, and customer segment reveals which parts of the business are truly profitable. A product with high revenue but low contribution margin may be dragging down profitability. Similarly, an acquisition channel that brings in customers with lower average contribution margins may look good on a revenue dashboard but underperform on actual profit generation.