Finance guide
Understanding Contribution Margin for Small Businesses
Use contribution margin to decide which products, bundles or campaigns deserve more attention.
What contribution margin measures
Contribution margin is revenue minus costs that change with a sale. It shows how much one order contributes toward fixed costs and eventual operating profit. It can be expressed as an amount per order or as a percentage of revenue.
Example for a product seller
A $75 order with $24 product cost, $9 fulfillment, $8 marketplace fees and $10 advertising has a $24 contribution margin. That $24 still needs to support salaries, software, rent and other fixed expenses. A positive number therefore does not automatically mean the whole business is profitable.
Use it for decisions
Compare contribution margin across products using the same cost rules. Test whether a bundle improves dollars contributed even if its percentage margin is lower. For advertising, the pre-ad contribution amount also sets the ceiling for acquisition cost before the first order loses money.
Test the numbers
Use your own current costs and keep a dated note for every marketplace fee, carrier rule or operating assumption that may change.