How is contribution margin calculated?
The formula is:
Contribution margin = revenue − variable costs
Variable costs are all costs that arise with every sale. In online retail, these are mainly cost of goods, shipping, packaging, payment fees and returns. Fixed costs such as rent, salaries or software arise regardless of the number of sales and are left out here.
Worked example for one order, all figures excluding VAT:
- Basket value: €80
- Cost of goods: €40
- Shipping and packaging: €6
- Payment fees and share of returns: €6
€80 − €52 = €28 contribution margin. For a single product, the figure is called the unit contribution margin: selling price minus variable unit costs.
Contribution margin I, II and III
In multi-level contribution margin accounting, costs are deducted step by step. This shows you where profit is lost. There is no fixed standard for the levels. In online retail, this breakdown is common:
| Level | Calculation | Example per order |
|---|---|---|
| Contribution margin I | Revenue − cost of goods | €80 − €40 = €40 |
| Contribution margin II | CM I − shipping, packaging, payment fees, returns | €40 − €12 = €28 |
| Contribution margin III | CM II − advertising costs | €28 − €20 = €8 |
In management accounting, each level often deducts product, departmental and company-wide fixed costs. Define the levels for your own company once and then always calculate the same way, otherwise months and channels cannot be compared.
Contribution margin ratio and break-even point
The contribution margin ratio relates the contribution margin to revenue:
Contribution margin ratio = contribution margin ÷ revenue × 100
In the example, that is €28 ÷ €80 × 100 = 35%. Of every euro of revenue, 35 cents remain to cover advertising and fixed costs. Anything left after that is profit.
You can also use the contribution margin to calculate the break-even point: fixed costs ÷ contribution margin per sale. With €14,000 in fixed costs per month and a contribution margin of €28 per order, the shop needs 500 orders to cover its fixed costs. If you include advertising costs of €20 per order, €8 per order remains and it needs 1,750 orders.
Contribution margin in online marketing: the limit for advertising costs
For advertising campaigns, the contribution margin before advertising costs is the most important limit, in the example contribution margin II. If advertising costs per order are higher, every order sold loses money. This gives you three limits:
- Affordable cost-revenue ratio (CRR), also known as cost of sale: no more than the contribution margin ratio, 35% in the example.
- Break-even ROAS: 1 ÷ contribution margin ratio, in the example 1 ÷ 0.35 = 2.86. Every euro spent on advertising must bring in at least €2.86 of revenue.
- Affordable cost per order (CPO): basket value × contribution margin ratio, €28 per order in the example. For enquiries, the same applies to the affordable cost per lead (CPL): contribution margin per closed deal × close rate.
At these limits, nothing is left for fixed costs after advertising: contribution margin III is zero. To cover fixed costs as well, CRR and CPO must be below them and ROAS above. The expert mode in the calculator below shows how far. For new customers who buy again, a campaign can still be profitable above the limit. In that case, base the calculation on the customer lifetime value (CLV).
Make sure your ad account and your shop calculate the same way. Google Ads works with the conversion value it receives, gross or net depending on the setup and usually without deducting later returns. A target ROAS based on net figures will then not match gross figures in the account.
Contribution margin, gross profit, margin and profit
These terms are often mixed up in everyday use. They differ in which costs have been deducted:
| Term | Calculation | Difference from contribution margin |
|---|---|---|
| Gross profit | Revenue − cost of goods | In retail, this equals contribution margin I; shipping and fees have not yet been deducted |
| Gross margin | (Selling price − purchase price) ÷ selling price × 100 | Gross profit as a percentage of the selling price |
| Contribution margin ratio | Contribution margin ÷ revenue × 100 | Contribution margin as a percentage of revenue |
| Profit | Contribution margin − fixed costs | Also deducts rent, salaries and software |
Depending on who you talk to, “margin” can mean gross margin, contribution margin ratio or profit margin. Ask which costs have been deducted before you use a margin to calculate target values for campaigns.
Contribution margin calculator
The calculator shows the contribution margin, the contribution margin ratio, the highest affordable CRR and the break-even ROAS. If you enter advertising costs, it also shows the contribution margin after advertising and your current CRR.
In expert mode, you enter the share of rent, salaries and insurance that each sale has to carry, for example €1.75 per order with €14,000 in fixed costs and 8,000 orders a month. The calculator then shows the profit per sale and how much advertising is affordable after fixed costs. The i next to each label explains what belongs in the field.
Revenue excluding VAT, per order, per product or for a period. All fields must refer to the same basis.
Costs that arise with every sale: cost of goods, shipping, packaging, payment fees and returns. Rent, salaries and insurance are fixed costs and do not belong here.
Media costs for these sales, for example from Google Ads, Meta or affiliate commissions. Leave empty if you only want to calculate the contribution margin.
The part of rent, salaries, insurance and software that each sale has to carry. Example: €14,000 in fixed costs per month and 8,000 orders give €1.75 per order.
Enter net revenue and variable costs. Fixed costs such as rent and salaries are not included.
All amounts excluding VAT. Calculate per order, per product or per month.
