What is contribution margin?
Growth economics & retention
How is contribution margin different from gross margin?
Gross margin usually stops at the cost of the product1. Contribution margin goes further and takes out the costs an order triggers: delivery, payment fees, returns, discounts. Those costs vanish if you sell nothing and grow with every sale. That is why they belong in the number that decides your ad budget.
What is the contribution margin formula?
Contribution margin = revenue minus variable costs. Divide by revenue to get it as a percentage. That is the formula one vendor's guide gives1. Work per order: take revenue, subtract each variable cost. Then say whether you mean a sum per order or a percentage of revenue. Every time.
What do CM1, CM2 and CM3 mean?
The labels are not standardised. One vendor treats CM2 as contribution profit after marketing costs1. Another vendor puts CM2 after fulfilment costs and ad spend, and CM3 after further variable costs such as customer service and chargebacks2. Same label, different cost lines.
So we do not use the labels on their own. We write out the cost lines instead.
| Name we use | Cost lines taken out of revenue |
|---|---|
| Contribution margin | Cost of goods, shipping, payment fees, returns, discounts |
| Contribution after marketing | The above, plus ad spend |
Contribution after marketing is the figure that shows whether the ads left you anything.
Why does it matter for ad spend?
ROAS divides revenue by ad spend. It says nothing about the costs between revenue and the bank. One UK agency lists contribution margin by campaign among the figures you should demand instead of vanity metrics3. We agree with the demand. A campaign can look healthy in the platform and still lose money once returns and delivery are paid.
Contribution margin also gives you break-even ROAS: the lowest ROAS at which ads do not lose money on the orders they bring. For the full chain from ROAS to profit, see ROAS looks good but no profit.
For ZFD: We work out break-even from contribution margin before marketing, and we say which margin we used. Our view, not an industry standard.
Worked example
Easily confused with
Contribution margin vs Gross margin
Product costs only, in most definitions.
Contribution margin vs Profit margin
We avoid the term. It is ambiguous.
Contribution margin vs Contribution after marketing
Contribution margin minus ad spend.
Buzzword alert
"We optimise for contribution, not revenue"
Usually means: a profit-like measure whose cost lines may not match your own.
Ask: which costs sit in it?
FAQ
Is contribution margin the same as profit?
No. It leaves out fixed costs such as salaries and rent1. It shows what each order contributes towards them.
Does contribution margin include ad spend?
Not in our definition. Sources vary, so check which costs any report includes. We call the figure after ad spend contribution after marketing.
Let’s find what’s actually working.
Next step. Work out your own break-even with the Break-even ROAS & contribution margin calculator. Then test the ROAS in your panel with the Is your ROAS real? calculator.