Contribution margin
Contribution margin is what one sale contributes towards fixed costs and profit, after every cost that exists only because the sale happened.
Updated
- Formula
- contribution margin = price − variable costs per unit
- Also called
- unit contribution, contribution per unit
- Unit cost · Supplier AIn Shopify's cost per item$21.40
- Packaging · Per unitIn Shopify's cost per item$1.20
- Pick and pack · Per unit, whole shopKept in Cogsy only$2.85
- Payment processing · 2.9% of priceKept in Cogsy only$1.97
Variable costs in ecommerce
A cost is variable if selling one more unit causes it:
- the product’s landed cost;
- packaging;
- pick and pack;
- payment processing, usually a percentage of the price;
- shipping you pay for;
- an allowance for returns.
Rent, salaries and software subscriptions are fixed. They do not change when one more order comes in.
Worked example
| Amount | |
|---|---|
| Price | $68.00 |
| Unit cost | −$21.40 |
| Packaging | −$1.20 |
| Pick and pack | −$2.85 |
| Payment processing, 2.9% | −$1.97 |
| Contribution margin | $40.58 |
As a percentage of price that is 59.7%. The gross margin on the same product is 66.8%; the seven points between them are the cost of fulfilling and charging for the order.
What it is for
- Pricing and discounts. A 20% discount takes $13.60 off the price and leaves a contribution of about $27.37, because the payment fee falls slightly too.
- Ad spend. Contribution margin is the most you can pay to win the order without losing money on it.
- Break-even volume. Fixed costs divided by contribution per unit is the number of units you need to sell.
In Cogsy
The margin Cogsy shows for a variant is on its total cost: the unit cost plus every cost you add on top, per unit or as a percentage of price. With fulfilment and fees entered as cost kinds, that figure is a contribution margin before shipping and ads.
Questions
- How is contribution margin different from gross margin?
- Gross margin subtracts only the cost of the goods. Contribution margin also subtracts the variable costs of selling them, such as fulfilment, payment fees and shipping.
- Should advertising be included?
- Many stores report it both ways. Contribution margin before ad spend shows what a sale is worth; after ad spend it shows what the sale kept once the cost of winning it is paid.
Related
Glossary
Gross marginGross margin is gross profit as a percentage of revenue. The formula, a worked example, how it differs from markup, and why a missing cost inflates it.
Glossary
Break-even priceThe break-even price is the lowest price at which a sale covers its own costs. The formula with percentage fees included, and a worked example.
Feature
Costs on top of the unit costPackaging, fulfilment or duties per unit, or fees as a percentage of the price, for a variant, a product or the whole shop.
Cost types
Cost typesThe costs merchants add on top of the unit cost, one by one.