What is contribution margin? Meaning for marketers
Contribution margin is what is left of each sale after the costs that rise with every order. Here is what it means, how to calculate it, a worked GBP example, how it differs from gross margin and why it sets your break-even ROAS.
Contribution margin is what is left of each sale after you pay the costs that rise with every order: product, shipping, packaging, payment fees and returns. It is stated per order or as a percentage of net revenue. For marketers it is the key input to break-even ROAS and the most you can spend to win a sale.
How do you calculate contribution margin?
| Metric | Formula |
|---|---|
| Contribution per order | Net revenue − variable costs |
| Contribution margin % | (Net revenue − variable costs) ÷ net revenue |
| Break-even ROAS | 1 ÷ contribution margin % |
Net revenue is the price after VAT and discounts. Variable costs are those that grow with each order, while fixed costs such as rent, salaries and software are left out. Ecommerce teams sometimes report several levels, such as after product costs, after fulfillment and payment, and after ad spend, so state which one you mean.
Contribution margin example
An illustrative order for a UK pet supplies brand, where the standard VAT rate is 20%:
| Line | Amount |
|---|---|
| Price including VAT | £72.00 |
| Net revenue | £60.00 |
| Product cost | £24.00 |
| Delivery and packaging | £7.00 |
| Payment fees | £1.50 |
| Returns allowance | £3.50 |
| Contribution | £24.00, a 40% margin |
Break-even ROAS is 1 ÷ 0.40 = 2.5, and the most the brand can pay in ads for this order without losing money is £24.
What is a good contribution margin?
It depends on category and business model, so there is no universal benchmark. What matters is whether the margin leaves room for the ROAS your channels can actually deliver: a 25% margin needs ROAS 4.0 just to break even, while a 50% margin needs 2.0. If your channels cannot reach break-even, fix pricing, costs or average order value before adding spend.
Related terms
- Break-even ROAS: 1 divided by contribution margin.
- POAS: contribution profit divided by ad spend.
- Customer lifetime value: contribution over many orders.
How Grower helps
The DTC ecommerce page includes a break-even ROAS calculator. Inside the platform, Grower compares budgets with live spend from connected channels and generates budget insights every month.
Frequently asked questions
What is the difference between contribution margin and gross margin?
Gross margin subtracts only the cost of goods sold. Contribution margin also subtracts every other cost that rises with each order, such as delivery, packaging, payment fees and returns. For ecommerce the difference can be large: a product with a 60% gross margin might have a 40% contribution margin once fulfillment and returns are counted.
Is ad spend included in contribution margin?
It depends on the level you report. For break-even ROAS, leave ad spend out, because the point is to find how much margin is available to pay for ads. Some teams also report contribution after marketing, sometimes called CM3, to show the profit left after acquisition costs. Always label which version a figure uses.
Why does contribution margin fall during sales?
Discounts cut net revenue, but product, delivery and payment costs stay roughly the same per order. In the example above, a 20% discount takes net revenue from £60 to £48 while costs stay at £36, so contribution falls from £24 to £12 and the margin from 40% to 25%. Break-even ROAS rises from 2.5 to 4.0.
Turn your contribution margin into a break-even ROAS with the free break-even ROAS calculator, or read the break-even ROAS formula guide for VAT examples in four markets.