What is contribution margin?
Contribution margin comes from management accounting. It shows what each sale contributes to the costs you have anyway, such as rent, salaries and software. Only once those fixed costs are covered do you make a profit.
In Ecommy's Commerce Intelligence Model this is called profit after order costs: the middle of three layers of profit, after profit after cost of goods and before profit after marketing.
How do you calculate it?
Add up every cost that moves with your sales, and subtract it from revenue excluding VAT.
Example: you sell a product for €100 excluding VAT. Cost of goods is €40, shipping, payment fees and commission come to €15, and returns cost €5 per sale on average. The contribution margin is €100 − €60 = €40, or 40%. With €10,000 in fixed costs per month, you need 250 of these sales to break even.
Does advertising count?
Opinions differ. Ad spend partly moves with your sales, but you decide how much to spend. That is why e-commerce often works in layers: after cost of goods, after order costs and after marketing. You will also see them called CM1, CM2 and CM3.
Ecommy keeps marketing separate. Contribution before marketing is your profit after order costs; what is left after advertising is your profit after marketing. That way you see whether a product makes money on its own, and whether your ads do too.
Contribution margin vs. gross margin
Gross margin only subtracts the cost of goods. Contribution margin subtracts all variable costs. Two products with the same gross margin can have a very different contribution margin, for example when one is heavy to ship or often comes back.
In Ecommy
Ecommy calculates contribution per order as profit after order costs, with costs from your shop, marketplaces, logistics and payment providers, on your definitions. You see it per product, channel and campaign.