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Contribution Margin

The Contribution Margin, a crucial profitability metric, is the leftover from Gross Sales after deducting all the direct costs of fulfilling the orders. Some argue that it is the same as Net Gross Profit 3, taking marketing spending into account. In contrast, others say marketing spending should not be part of calculating the contribution margin.

Contribution Margin in e-commerce is not the same to everybody. Why is that? It might be because people focus on different things in e-commerce, and when it comes to Contribution Margin, it's very clear that this is the case. So whenever Contribution Margin is mentioned as an important part of a discussion or a potential decision, you need to make sure that you all mean the same thing.

According to some people, Contribution Margin have different layers (1, 2, 3), and to other it is absolute and always means the same.

When someone is referring to "The Contribution Margin" it most often means the remaining amount from your Gross Sales after subtracting all the costs directly associated with selling a product. It is similar to Net Gross Profit 3, as both formulas calculate the difference between Gross Sales and the expenses tied to product sales. However, while Net Gross Profit 3 also includes marketing expenses, many calculate the Contribution Margin solely considering direct product costs.

Contribution Margin is an essential metric for determining a company's profitability and evaluating the cost-effectiveness of its products.

If you want to read more about Contribution Margin, and the different layers of it; click here to read our blog post about Contribution Margin

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