Profit guide
Shopify contribution margin, explained
Revenue tells you how much you sold. Contribution margin tells you how much each order actually leaves you after the costs it created. This guide shows how to calculate it for a Shopify store and how to use it to set ad budgets.
Written by Malick Alexandre Sarr, co-founder of Avantages. Published on . About 7 minutes to read.
What is contribution margin?
Contribution margin is what an order leaves you after all the costs that grow with each order: product costs, shipping, payment fees and the marketing it took to win the order. It is the money that pays for your fixed costs, such as salaries and rent, and then becomes profit.
In a formula, contribution margin = net sales − product costs − shipping and fulfilment − payment fees − marketing.
A worked example for one order
The table follows one illustrative order from the price the customer saw to the money it contributes.
| Line | Amount | Running total |
|---|---|---|
| Gross sales | $90.00 | $90.00 |
| Discount | −$10.00 | $80.00 net sales |
| Product cost (COGS) | −$24.00 | $56.00 (CM1) |
| Shipping and fulfilment | −$9.00 | $47.00 |
| Payment fees | −$2.62 | $44.38 (CM2) |
| Ad spend per order | −$22.00 | $22.38 (CM3) |
CM1, CM2 and CM3
Many e-commerce teams split contribution margin into three levels, so they can see where margin is lost.
- CM1 is net sales minus product costs. It is the same as gross profit and shows whether your prices cover what you sell.
- CM2 also takes away shipping, fulfilment and payment fees. It shows what an order earns before marketing.
- CM3 also takes away marketing. It shows what an order really contributes to the business.
Use CM2 to find your break-even ROAS
Break-even ROAS is the return on ad spend at which an order exactly pays for its own ads. It equals net sales divided by CM2. In the example, net sales are $80 and CM2 is $44.38, so break-even ROAS is about 1.8.
A campaign with a ROAS below 1.8 loses money on the first order. It can still be worth running if those customers come back, which is why contribution margin and lifetime value belong together.
Common contribution margin mistakes
- Starting from gross sales instead of net sales, which ignores discounts and returns.
- Leaving out returns and refunds, which are a real cost for fashion and beauty brands.
- Using an old product cost after a supplier price change.
- Forgetting free-shipping costs that you pay on behalf of the customer.
- Comparing campaigns on ROAS alone, without knowing the break-even ROAS for the products they sell.
Profit in AvantagesComing soon
From gross sales to net profit, automatically
Avantages profit tracking will follow every dollar from gross sales to net profit, with discounts, returns, product costs, shipping, fees and ad spend taken away. Sales, orders and average order value are live today.
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