Definition
Contribution margin is revenue minus variable costs. It covers fixed costs and then profit.
Formula
Contribution margin = revenue - variable costs
Example
If revenue is $100 and variable costs (COGS + fees + shipping + returns) are $60, contribution margin is $40 (40%).
How to use it
- Use contribution margin when setting break-even ROAS/CPA targets (profitability depends on variable costs).
- Separate variable costs from fixed costs (rent, base salaries) to avoid double counting.
Common mistakes
- Mixing fixed and variable costs inconsistently.
- Ignoring variable costs like payment fees, returns, or shipping when they matter.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Contribution Margin" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., Paid Ads Funnel Calculator) to sanity-check assumptions.
- Read the related guide (e.g., Paid ads funnel: CPM, CTR, CVR -> CPC, CPA, ROAS (with profit)) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Paid Ads Funnel Calculator: Model CPM -> CTR -> CVR to estimate CPC, CPA, ROAS, and profit per 1,000 impressions (with margin and variable costs).
- Break-even Pricing Calculator: Compute contribution margin, break-even units, and profit at a given volume based on price and variable costs.
- Break-even ROAS Calculator: Estimate the break-even ROAS based on contribution margin assumptions.
- ROAS Calculator: Calculate Return on Ad Spend (ROAS) and estimate contribution profit after ad spend.
- Target ROAS Calculator: Estimate a target ROAS to cover variable costs plus a desired margin buffer.
Guides
- Paid ads funnel: CPM, CTR, CVR -> CPC, CPA, ROAS (with profit): A practical guide to the paid ads funnel: how CPM, CTR, and CVR drive CPC, CPA, ROAS, and profit - with formulas and common pitfalls.
- Break-even pricing: contribution margin, break-even units, and profit: A practical guide to break-even pricing: how to compute contribution margin, break-even units, and profit at expected volume.
- Break-even revenue: calculate your break-even point: Understand break-even revenue with gross margin and fixed costs, plus tips for improving contribution margin and pricing.
- Incrementality lift: how to compute incremental ROAS from holdouts: Turn an exposed vs holdout test into incremental conversions, incremental ROAS, and incremental profit for decision-making.
- Marginal ROAS: how to scale ads with diminishing returns: A practical guide to marginal ROAS: why average ROAS misleads at scale, how diminishing returns work, and how to pick a profit-maximizing spend level.