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E-commerce Contribution Margin
profitabilityThe amount each unit sold contributes toward covering fixed costs and generating profit. Calculated as selling price minus variable costs per unit.
Definition
Contribution margin answers a critical question: how much does each sale contribute to covering your fixed costs? Variable costs change with each unit (materials, shipping, transaction fees), but fixed costs remain constant regardless of volume (rent, salaries, insurance). The contribution margin is what bridges the gap between variable costs and total profitability.
This metric is essential for break-even analysis. If your fixed costs are $10,000 per month and each unit has a $25 contribution margin, you need to sell 400 units per month to break even. Every unit beyond 400 contributes $25 directly to profit. This clarity helps businesses make informed decisions about pricing, volume targets, and product mix.
Contribution margin also guides product prioritization. If Product A has a $15 contribution margin and Product B has a $40 contribution margin, and production capacity is limited, you should prioritize Product B. Even if Product A has a higher contribution margin percentage, the absolute dollars matter more when fixed costs need to be covered.
Formula
Contribution Margin = Selling Price per Unit - Variable Cost per Unit Example
A candle company sells candles for $28 each. Variable costs per candle are $9 (wax: $3, wick: $0.50, fragrance: $2, jar: $2, label: $0.50, shipping: $1). Contribution margin = $28 - $9 = $19 per candle. With $5,700 in monthly fixed costs, break-even is 300 candles/month.
Related Terms
Break-Even Point
profitabilityThe sales volume at which total revenue exactly equals total costs, resulting in zero profit and zero loss. Every unit sold beyond this point generates profit.
Gross Margin
profitabilityThe percentage of revenue remaining after subtracting the direct costs of producing goods or services (COGS). It measures production efficiency before operating expenses.
Gross Profit
profitabilityThe absolute dollar amount remaining after subtracting the cost of goods sold (COGS) from total revenue. It is the money available to cover operating expenses and generate net profit.
Cost of Goods Sold (COGS)
ecommerceThe direct costs attributable to producing or acquiring the goods sold by a company. COGS includes materials, direct labor, and manufacturing overhead, but excludes indirect costs like marketing and administration.
Put It Into Practice
Use these calculators to apply contribution margin to your own numbers.
Break-Even Calculator
Calculate your break-even point in units and revenue.
Open calculator →Profit Margin Calculator
Calculate gross, operating, and net profit margins.
Open calculator →Cost Per Unit Calculator
Calculate the true cost to produce one unit and find the right selling price.
Open calculator →