Ecommerce contribution margin measures how much profit is generated from each sale after accounting for variable costs like product production, shipping, and merchant fees and variable marketing. For ecommerce businesses, this metric is invaluable because it helps determine the profitability of each individual product and provides insight into overall business health. Unlike gross margin, which only accounts for the direct costs of goods sold (COGS), contribution margin also factors in variable marketing costs, such as ad spend, making it a more comprehensive indicator of profitability and a crucial part of your ecommerce accounting.
By closely monitoring ecommerce contribution margin, businesses can assess which products or sales channels are the most profitable and which ones may need adjustments. If a business has a low contribution margin, it may need to reduce variable costs, increase prices, or adjust marketing strategies. Ecommerce businesses that track and optimize their contribution margin can make smarter pricing and marketing decisions, helping them scale and maintain profitability even in competitive markets.
Read our in-depth article about the ecommerce contribution margin.
Ecommerce Contribution Margin Formula
Contribution Margin = Net Sales - Variable Costs
The contribution margin is calculated by subtracting the variable costs from the net sales.