What is Contribution margin?
Contribution margin is the money a single sale leaves behind after every variable cost of fulfilling it, and it is the pool from which advertising and fixed costs must be paid.
Updated
Contribution margin is the number that decides whether advertising can work at all, and it is the one most brands have never calculated properly. Everything downstream — break-even ROAS, affordable CAC, how hard you can scale — falls out of it.
The discipline is to deduct every variable cost, not just the obvious one. Cost of goods is the easy part. Shipping, packaging, payment gateway fees, cash-on-delivery handling and, in apparel, a realistic returns allowance all come out before a single rupee is available to pay for a customer. A brand that thinks it has 60% margin and actually has 40% will set targets it can never hit and conclude that paid media does not work for them.
Once you have the real figure, break-even ROAS is simply one divided by it. At 42% contribution margin you break even at about 2.4x. Every conversation about whether an account is performing should start there, because a 4x on one brand’s economics is a triumph and on another’s is a slow loss.
How Contribution margin is calculated
Contribution margin = Selling price − COGS − shipping − payment fees − returns allowance
A worked example
A ₹2,000 kurta costs ₹800 to make, ₹120 to ship, carries a 2% payment gateway fee and a 10% return rate.
- Selling price = ₹2,000
- Less COGS ₹800, shipping ₹120, gateway ₹40 = ₹1,040
- Less 10% returns allowance (₹200) = ₹840
Contribution margin = ₹840, or 42% of the selling price.
Common mistakes
- Using gross margin instead. Gross margin stops at cost of goods and ignores shipping, fees and returns, which flatters break-even badly.
- Forgetting the returns allowance in apparel and footwear, where it is often the single largest deduction after COGS.
- Applying one blended margin across a catalogue where products differ widely.
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