Contribution Margin

Contribution margin goes beyond gross margin by incorporating every variable cost tied to a specific order: COGS, outbound shipping, payment gateway fees (typically 2.5–3.5%), pick-and-pack labor, packaging materials, and return allowances. It answers the question: how much does this order actually contribute to covering fixed costs and profit? For ecommerce businesses, contribution margin is a more actionable metric than gross margin because it captures the full variable cost picture. A product with a 60% gross margin may have only a 22% contribution margin after accounting for $8.50 in shipping, $1.20 in payment fees, and $2.00 in fulfillment labor. Understanding contribution margin per order — and enforcing minimum thresholds — is central to profit governance and prevents the common trap of optimizing for revenue growth while actual per-order contribution declines.