Contribution margin is what one order leaves you after every cost that comes with that order. Take the order value and subtract product cost, shipping and fulfilment, payment fees and discounts. On a $60 order, that comes to $26.20, or 43.7% of the order. Subtract what you paid in ads to get the order and you see what it really earned.
We treat contribution margin as the most useful number in a Shopify store's economics. Gross margin tells you whether a product is priced well. Contribution margin tells you whether an order makes money, and how much you can spend to get the next one.
How to calculate contribution margin
The calculator uses this formula:
Contribution margin = order value − product cost − shipping − (order value × payment fee %) − discounts
Contribution margin % = contribution margin ÷ order value × 100
After ad cost = contribution margin − ad cost per order
Each term, per order:
- Average order value (AOV) is what the customer pays for the order before tax.
- Product cost is the landed cost of everything in the order: the products, inbound freight, duties and packaging.
- Shipping and fulfilment covers postage, pick and pack, and boxes, whether or not you charge the customer for shipping.
- Payment fees are your processor's percentage fee, charged on the order value.
- Discounts are the average value of codes and automatic discounts per order.
- Ad cost per order is optional: your ad spend divided by the orders it brought in.
Contribution margin worked example
These are the calculator's default inputs, plus one example with ads switched on.
| Line | Value |
|---|---|
| Average order value | $60 |
| Product cost | − $18 |
| Shipping and fulfilment | − $10 |
| Payment fees (3% of $60) | − $1.80 |
| Discounts | − $4 |
| Contribution margin | $26.20 (43.7%) |
| Ad cost per order | − $15 |
| After ad cost | $11.20 |
The product alone has a 70% gross margin. After the costs that ride along with every order, 43.7% is left. After a $15 ad cost, $11.20 is left to pay for everything else in the business. That gap between 70% and $11.20 is why we don't plan budgets on gross margin.
How to read your contribution margin result
Use your own numbers to make these calls:
- Before ads, it's your ceiling. Contribution margin before ads is the most you can pay to acquire one order and still break even on it. In the example, that's $26.20.
- After ads, it's what the order earned. If "after ad cost" is positive, the order paid for itself and helped cover fixed costs. If it's negative, you paid to make that sale.
- Compare it to your fixed costs. Multiply contribution after ads by your monthly order count. If that total doesn't cover salaries, apps and your Shopify plan, the store loses money even when every order looks profitable.
- Compare your channels. Run the calculator once per channel with that channel's ad cost per order. A channel with lower revenue but higher contribution after ads can be the better one.
If you want the ad spend threshold as a ratio rather than a dollar figure, use the break-even ROAS calculator.
What moves contribution margin
- Average order value. Shipping and fulfilment costs are partly fixed per order, so a bigger order spreads them thinner. Adding a relevant second item at checkout or after purchase is one of the cleanest ways to do that, and it's what our Invisible Second Sale service builds.
- Discount depth. Discounts come straight out of contribution margin. A $4 average discount on a $26.20 contribution is a big share. Review which codes are running and who's using them.
- Shipping and fulfilment. Renegotiate carrier rates, right-size boxes and review your free shipping rules. Each dollar saved per order lands in contribution margin.
- Product cost and price. A price rise or a lower landed cost moves contribution margin dollar for dollar. Our guide to ecommerce unit economics shows how these fit together.
- Ad efficiency. Lowering ad cost per order raises contribution after ads without touching anything else.
For a deeper look at the metric and how we use it, read our guide to contribution margin in ecommerce.
Common contribution margin mistakes
- Leaving shipping out because the customer pays it. If you charge shipping, include what you charge in the order value and what it costs you in shipping. Don't drop both.
- Forgetting discounts. A store running constant codes can have a very different contribution margin from the one it plans with.
- Including fixed costs. Salaries and software don't belong in a per-order figure. Mixing them in makes every order look worse and hides which ones actually lose money.
- Using attributed ad cost blindly. Ad platforms can claim orders they didn't cause. Cross-check ad cost per order against total ad spend divided by new orders.
- Judging repeat buyers on the first order alone. A customer who reorders brings contribution margin again without new ad cost. The customer lifetime value calculator shows what that's worth.
Where to go next
Contribution margin per order becomes far more useful when you see it across a whole month. The Shopify profit calculator adds your fixed costs, and the gross margin calculator checks product pricing on its own. All our tools are on the calculators page. If you'd like us to work through your numbers with you, start with a Gameplan.