Contribution margin
The number that decides whether a product can afford to be advertised, and the reason a 59% gross margin can be negative.
Also called Contribution per unit, Unit economics, Margin after variable costs.
What it is
Contribution margin is what a unit contributes toward fixed costs after every variable cost of selling it. It is the correct test for a catalogue decision, because fixed costs do not change when you stop selling one product and therefore should not be in the arithmetic that decides whether to.
net revenue per unit − variable cost per unit
- net revenue
- Price after discounts, before tax
- variable cost
- Landed goods cost, channel and payment fees, outbound shipping, pick and pack, and the measured cost of returns
The part the formula leaves out
Returns are the arithmetic that changes signs, and they have to be applied per unit ordered rather than per unit kept. A returned unit costs the outbound shipping twice, the inspection, and the fee that was not refunded, plus a markdown on whatever cannot go out again at full price. In the worked example the best-selling product contributes $6.02 on a unit that stays sold and −$2.15 across every unit ordered.
Landed cost is the second half. What the goods cost lives in the purchase orders rather than the sales export, and the two only meet through a SKU written four different ways. Inbound freight then has to be allocated, and the choice matters: allocating by weight rather than by value moves 41 products across the break-even line in the example, so the method belongs in the methodology rather than inside a formula.
Where to stop is a real decision. Classic contribution excludes advertising and overhead, and that is right for a catalogue decision because adding overhead only ever makes the answer worse without changing the ranking. Where per-product ad spend exists, report it beside contribution rather than inside it: that is how you find a product whose margin cannot fund the traffic buying it.
How it is usually computed wrongly
01
Using the margin in your store admin
It is price minus cost, and it is why unprofitable products survive for years. The example's best seller reports 59% there and contributes −$2.15 per unit ordered once discounts, fees, free shipping and a 26% return rate are counted.
Build contribution from the settlement or payout file, which contains what you were actually charged rather than what the fee schedule says.
02
Applying the return rate to revenue instead of to units
It understates the cost of a return by the shipping, handling and markdown, which are the majority of it for anything low-priced.
Compute the full cost of a returned unit and spread it across units ordered, so the figure describes the average unit you sell rather than the average unit you keep.
03
Allocating fixed costs into it
Overhead does not go away when a product does. Including it produces a contribution figure that recommends deleting products whose removal would make the business worse off.
Keep contribution free of fixed costs and check total contribution against total fixed costs separately.
04
Ranking products without the sensitivity
"Stop selling it" is rarely the answer and never the whole one, and a ranked list of losers invites exactly that decision.
Report the price, return rate and fee tier at which each product would work. The decision is then made against numbers rather than against a verdict.
What your file needs
- Order lines with quantity and the price actually paid
- Product costs, ideally landed rather than ex-works
- A settlement or payout file, for real fees
- Returns, tied back to the order lines they reverse
Anything missing is reported as unavailable rather than substituted with something weaker computed on worse evidence.
Compute it on your own file
No account needed to start. You only pay when you like what you see.