Contribution is the amount left from sales revenue after subtracting . This remainder covers and, once fixed costs are paid, becomes profit. E-commerce businesses use contribution margin to evaluate product profitability, set prices, and calculate break-even points.
What is Contribution Margin?
Contribution margin shows how much each sale contributes toward covering . A product with a $30 contribution margin means $30 from each sale goes toward rent, salaries, software, and other fixed costs.
The metric differs from in timing. Profit margin appears after all costs. Contribution margin appears after only variable costs, before fixed costs enter the calculation.
For e-commerce, contribution margin guides decisions about which products to promote, when to discount, and whether to discontinue items. A product with negative contribution margin loses money on every sale, even before accounting for overhead.
How to Calculate
Per Unit:
Contribution Margin = Selling Price - Variable Cost per Unit
As a Ratio:
Contribution Margin Ratio = Contribution Margin ÷ Selling Price × 100
Example:
- Selling price: $100
- Variable costs (, shipping, payment processing): $60
- Contribution margin: $100 - $60 = $40 per unit
- Contribution margin ratio: $40 ÷ $100 = 40%
Each sale contributes $40 toward fixed costs and profit.
Our Break-Even Calculator uses contribution margin to calculate exactly how many units you need to sell before turning a profit.
How to Use Contribution Margin
Break-even calculation: Divide total fixed costs by contribution margin per unit to find how many sales you need to break even.
Product comparison: Products with higher contribution margins deserve more marketing attention. A $20 contribution margin product may generate more profit than a $50 product with $5 contribution margin.
Discount decisions: Know your contribution margin before offering discounts. A 30% discount on a product with 35% contribution margin leaves almost nothing.
