Why contribution margin matters
Revenue and even gross margin can grow while the business starves: contribution margin is the honest per-order number, the one that says whether each incremental sale funds the company or costs it. Ad-driven stores live and die by it, because acquisition sits inside it.
Building the number
- Start with net revenue after discounts and returns
- Subtract landed product cost per unit
- Subtract per-order variables: fees, shipping, packaging, fulfillment
- Subtract marketing per order for the fully loaded view
Questions
Contribution margin vs gross margin: what’s the difference?
Gross margin stops at product cost; contribution keeps subtracting every cost that scales with the order. A fat gross margin with heavy shipping, fees, and ad costs can hide a negative contribution, which is exactly the case it exists to expose.
What decisions run on contribution margin?
The scaling ones: how much acquisition each product can afford, which SKUs deserve ad spend, where free shipping breaks, and whether growth is compounding or just expensive. It’s the unit economics dashboard in one line.