Key takeaways
- Gross margin = (Revenue − COGS) ÷ Revenue. It measures product-level profitability.
- Contribution margin subtracts all variable costs, including shipping, fees, and ad spend.
- Gross margin sets your breakeven ROAS; contribution margin tells you if you cleared it.
- Use gross margin for pricing; use contribution margin for scaling and budget decisions.
- Both should be tracked per product, not just store-wide.
What is gross margin and how do you calculate it?
Gross margin formula
Gross margin % = (Revenue − COGS) ÷ Revenue × 100. If you sell a product for $50 and it costs $20, gross margin = (50 − 20) ÷ 50 = 60%.
COGS (cost of goods sold) is the direct cost of the product itself — manufacturing or wholesale cost, plus inbound freight and any per-unit packaging. Gross margin tells you how much of each sale is available to cover everything else: marketing, shipping, overhead, and profit.
It's the right metric for pricing and product decisions because it isolates the product's economics from how you happen to market it.
What is contribution margin and how do you calculate it?
Contribution margin formula
Contribution margin = Revenue − COGS − all other variable costs (shipping, payment fees, fulfillment, ad spend). It can be shown per order or as a percentage of revenue.
Contribution margin answers a sharper question: after everything that varies with this order, how much is left to cover fixed costs and profit? Because it includes acquisition cost, it's the metric that reveals whether a paid sale was actually worth making.
How do gross and contribution margin differ in practice?
| Line item | Amount | Running margin |
|---|---|---|
| Revenue | $50.00 | — |
| − COGS | $20.00 | Gross profit: $30.00 (60%) |
| − Payment fee (3%) | $1.50 | $28.50 |
| − Shipping | $6.00 | $22.50 |
| − Ad cost (acquisition) | $12.00 | Contribution: $10.50 (21%) |
Same order, two very different stories. The product looks healthy at a 60% gross margin, but once shipping and a $12 acquisition cost are included, only $10.50 — a 21% contribution margin — is left to cover overhead and profit. This is why a store can look profitable on gross margin and struggle in reality.
Connect it to ROAS
Gross margin sets your breakeven ROAS (1 ÷ gross margin). Contribution margin confirms whether a campaign actually beat that breakeven after real shipping and fees.
When should you use each metric?
- Use gross margin to set prices, evaluate suppliers, and rank products by inherent profitability.
- Use contribution margin to decide how much to spend acquiring customers and which orders are worth it.
- Use both per product — a high-gross-margin product can have a poor contribution margin if it's heavy or hard to ship.
- Recompute when costs change: supplier price increases, shipping rate changes, or rising CPAs all move the line.
How do you track margins without a spreadsheet?
The formulas are simple; keeping them current is the work. Product costs live in your commerce platform, shipping and fees vary by order, and ad spend sits in Meta and Google. Pulling these together by hand each week is where most teams give up.
- 1
Load product costs
Keep COGS up to date in your store so per-product gross margin is always available.
- 2
Capture variable costs
Track payment fees, shipping, and fulfillment per order, not as a guessed average.
- 3
Attribute ad spend
Blend Meta and Google spend into the order economics to reach true contribution margin.
- 4
Flag low-margin SKUs
Surface products whose contribution margin turns negative once ad spend is included.
Frequently asked questions
Is contribution margin always lower than gross margin?
Yes, because contribution margin subtracts everything gross margin does plus additional variable costs like shipping, payment fees, and ad spend. Gross margin is the ceiling; contribution margin is what's actually left to cover fixed costs.
Does contribution margin include fixed costs?
No. Contribution margin only subtracts variable costs — those that change with each order. Fixed costs like salaries, rent, and software are covered by the total contribution margin across all orders, and what remains after them is operating profit.
What's a healthy contribution margin?
It must be positive and, in aggregate, large enough to cover your fixed costs and leave profit. Rather than chasing a benchmark, track your own contribution margin over time and protect it as you scale spend.
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