Contribution Margin

Contribution margin is the money a single order contributes towards your fixed costs and profit, once all the costs caused by that order are taken out. That means product cost, shipping, packaging, payment processing and pick-and-pack. Whatever is left contributes to rent, salaries, software and, eventually, what you keep. It can be shown as a pound amount per order or as a percentage of revenue.

It is not gross margin, which is the term people usually mean when they say margin. Gross margin subtracts only the cost of goods, so it ignores the shipping label and the card fee that also leave your account on every order. It is also not net profit, which comes after fixed costs and marketing are deducted too.

Contribution margin equals revenue minus variable costs. As a percentage, divide that figure by revenue. The honest version counts every cost that moves with volume: product, inbound freight spread per unit, outbound shipping, packaging, transaction fees, and returns or refunds at your actual rate. The flattering version quietly drops shipping, fees and returns, which inflates the number by several points and makes unprofitable orders look fine. Decide once which costs are variable, write the list down, and apply it to every product.

AOV tells you the size of an order; contribution margin tells you how much of it survives. CAC is what you paid to win that order, so contribution margin minus CAC is roughly what you kept. Break-Even ROAS is calculated directly from your contribution margin percentage. MER judges spend efficiency across the whole account rather than one sale.