---
title: "What is contribution margin? Formula | Product Metrics"
description: "Contribution margin is what a sale leaves after its variable costs. See the formula, a worked example per order and why it sets each product’s break-even ROAS."
canonical: "https://www.productmetrics.io/glossary/contribution-margin"
pageType: article
language: en
publisher: "Product Metrics"
author: "Berend Vrakking"
datePublished: 2026-10-07
dateModified: 2026-10-07
---

> Content index: https://www.productmetrics.io/llms.txt

# Contribution margin

Contribution margin is the revenue from a sale minus its variable costs, such as product cost, shipping, payment fees and returns.

## Formula

`Contribution margin = revenue − variable costs`

Divide by revenue to get the percentage. Use revenue excluding VAT. Variable costs are the ones tied to each order: product cost, shipping, payment fees, packaging, returns. Fixed costs such as rent and salaries stay out.

## Example

Worked example, one order:

| Item | Amount |
| --- | --- |
| Order value (excl. VAT) | €100.00 |
| Cost of goods | −€45.00 |
| Shipping | −€5.00 |
| Payment fees (3%) | −€3.00 |
| Pick, pack and packaging | −€2.00 |
| Contribution margin | €45.00 (45%) |

Each order leaves €45.00 to pay for ads and fixed costs. Break-even ROAS is 1 ÷ 0.45 = 2.22. Illustrative data.

## For one product, and for an account

Product cost, shipping weight and return rate change from product to product, so two products at the same price can leave very different amounts. One is light and rarely comes back; the other ships like a sofa and returns like a boomerang. A shop-wide margin averages them into a number neither product has, and hides the one that loses money once ads are paid for.

It is also the number that sets break-even ROAS: 1 ÷ contribution margin %. Product Metrics works on ROAS right away and switches to POAS, profit on ad spend, once margins are connected.

## Common mistake

Stopping at product cost. Shipping, payment fees and returns come off every sale whether the spreadsheet lists them or not, and leaving them out makes break-even ROAS look lower than it is.

## Questions

### Is contribution margin the same as profit margin?

No. Contribution margin takes off only the variable costs of each sale. Net profit margin also takes off fixed costs such as rent and salaries. A product can have a healthy contribution margin and still not cover the fixed costs of the business.

### What does a 50% contribution margin mean?

Of every €1.00 of revenue, €0.50 is left after variable costs, and that is all there is for ads and fixed costs. Break-even ROAS at that margin is 1 ÷ 0.50 = 2.

### Is a higher contribution margin good?

Per sale, yes: the product can break even at a lower ROAS. Check volume as well, because a fat margin on a product that rarely sells adds little in total.

## Keep reading

- [Break-even ROAS calculator](https://www.productmetrics.io/break-even-roas-calculator): Find the return each product needs to break even.
- [Markup and margin calculator](https://www.productmetrics.io/margin-calculator): Work out margin, markup and selling price from cost.
- [Gross margin](https://www.productmetrics.io/glossary/gross-margin): The margin after product cost only, before shipping, fees and returns.
- [Target ROAS from margin](https://www.productmetrics.io/blog/target-roas-from-margin): Turn a margin into a ROAS target.
- [POAS vs ROAS](https://www.productmetrics.io/blog/poas-vs-roas): Why profit on ad spend starts from contribution margin.
- [Product Segmentation](https://www.productmetrics.io/product-segmentation): See each product in one of six segments, by volume and return.
- [Ecommerce return rate](https://www.productmetrics.io/blog/ecommerce-return-rate): What returns do to contribution margin and break-even ROAS.

---

Written by Berend Vrakking, founder of Product Metrics. Last updated 2026-10-07.

HTML version: https://www.productmetrics.io/glossary/contribution-margin