Margin Analysis
Contribution Margin
By Herzel MishelFounder, AgentisLast reviewed
Definition
The revenue remaining after deducting all variable costs associated with fulfilling an order, including COGS, shipping, payment processing fees, and pick-and-pack labor.
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.
Related Terms
Margin Analysis
Gross Margin
The percentage of revenue remaining after subtracting the cost of goods sold, a foundational profitability metric that excludes operating expenses, taxes, and interest.
Cost Management
Landed Cost
The total cost of a product delivered to the customer, including COGS, freight, duties, tariffs, insurance, and handling fees.
Margin Analysis
Order Profitability
The true net profit of a single order after deducting all variable costs: COGS, shipping, discounts, payment fees, fulfillment labor, and return allowances.
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