Contribution margin by product: the number that decides what to scale
Revenue tells you what sells. Contribution margin tells you what pays for your growth. Here’s how to calculate it for every product.
Two products can bring in the same revenue and have completely different effects on your business. One funds your growth. The other quietly drains it. Contribution margin is how you tell them apart.
What contribution margin is
Contribution margin is what a product earns after the costs that come with selling it. For most online brands that means:
- Product cost (what you paid to make or buy it)
- Shipping and fulfillment
- Payment and marketplace fees
- Discounts and promotions
- Returns and refunds
- Advertising spent to sell it
What’s left is the product’s contribution to fixed costs and profit.
A worked example
A serum sells for $40. It costs $9 to make, $6 to ship, $1.60 in fees, and it carries an average $4 discount. Ten percent of orders are returned, costing about $4 per order on average. Ad spend works out at $12 per order. Contribution margin: $3.40 per order, or 8.5%. Healthy revenue, thin profit.
Why it changes what you scale
Scaling a product with a thin or negative contribution margin makes you bigger and poorer at the same time. Ranking products by contribution margin, not revenue, shows where extra budget will actually pay back.
Common mistakes
- Using average costs for all products instead of costs per product
- Ignoring returns because they arrive later
- Counting ad spend at campaign level instead of per product
How Purser helps
Purser calculates contribution margin for every product automatically from your store, ad, payment and accounting data, keeps it updated, and steers spend toward the products that pay.
