Contribution Margin: What It Is, How to Calculate It and Why It Matters for Ecommerce

Contribution margin is the money a sale leaves you after the variable costs of making that sale. You calculate it as revenue minus variable costs, like product costs, shipping, fulfillment and payment fees. For example, a $100 order that costs you $45 to make and deliver has a contribution margin of $55, or 55%. Subtract marketing as well and you get contribution margin after marketing, the one number we'd use to judge the health of an ecommerce brand.

If I could only look at one number to judge an ecommerce brand, it wouldn't be revenue.

It would be contribution margin after marketing.

Revenue tells you how much you sold. Contribution margin tells you how much of it you actually kept to pay for everything else.

So here's what contribution margin is, how to calculate it, and how email should make it better, not worse.

By Emiel Dingemans, Founder of Magicianly

Updated October 2026

What Is Contribution Margin?

Contribution margin is what's left from your revenue once you remove the costs that only exist because you made those sales.

Those are your variable costs. Sell one more order and they go up. Sell one fewer and they go down. Product costs, shipping and payment fees all work like that.

What's left "contributes" to your fixed costs, like salaries, rent and software, and then to profit. That's where the name comes from.

What Is the Contribution Margin Formula?

Contribution margin = revenue minus variable costs

You can use it for a single order, a product, a month or your whole store.

Per unit, it's the same idea:

Contribution margin per unit = selling price minus variable cost per unit

For an ecommerce brand, variable costs usually include:

• cost of goods sold (what the product costs you);
• shipping, fulfillment and packaging;
• payment processing fees;
• returns and refunds, if your revenue number is from before them.

There's no single universal list. Different brands draw the line between variable and fixed costs a little differently. What matters is that you define it once and measure it the same way every month.

How Do You Calculate Contribution Margin?

Take your revenue for a period and subtract every variable cost for the same period.

Here's an example for one order:

1. 1Revenue after discounts: $100
2. 2Cost of goods sold: $30
3. 3Shipping and fulfillment: $12
4. 4Payment processing fees: $3

Variable costs: $30 + $12 + $3 = $45

Contribution margin: $100 minus $45 = $55

That $55 is what this order contributes to everything else in your business.

Now see what a discount does. Give the same customer 20% off and your revenue drops to $80. Keep the other costs the same for simplicity, and your contribution margin falls from $55 to $35. A 20% discount just took more than a third of your contribution margin.

That's why we always check the margin on the weakest product a discount applies to before we choose an offer.

What Is the Contribution Margin Ratio?

The contribution margin ratio is your contribution margin as a percentage of revenue.

Contribution margin ratio = contribution margin ÷ revenue

In the example above: $55 ÷ $100 = 55%.

The ratio makes it easier to compare products, months and channels with very different revenue. A product that sells less but keeps 60% of every sale can be worth more to you than a bestseller that keeps 20%.

What's the Difference Between Contribution Margin and Gross Margin?

Gross margin only subtracts the cost of goods sold. Contribution margin subtracts all variable costs.

For an ecommerce brand, the gap between the two can be big. Shipping, fulfillment and payment fees come with every single order. Gross margin can look healthy while contribution margin is thin.

What Is Contribution Margin After Marketing?

Contribution margin after marketing also subtracts what you spent on marketing to get those sales.

Using the same example: if you spent $25 in marketing to get that $100 order, your contribution margin after marketing is $55 minus $25 = $30, or 30%.

This is the version we care about most. Revenue can grow while contribution margin after marketing shrinks. If that's happening, you're scaling inefficiently. Here's where it fits next to the other ecommerce retention metrics we track.

Healthy ecommerce brands don't just scale their revenue. They scale their margin.

What Is a Good Contribution Margin for Ecommerce?

There's no universal good contribution margin. It depends on your product, your price point and your fixed costs.

What matters is that it's high enough to cover your fixed costs and leave a profit, and that it moves in the right direction as you grow. Compare it with your own numbers over time, not with another brand's.

Why Can Revenue Grow While Contribution Margin Shrinks?

Usually for one of four reasons:

1. 1Too many discounts. Discounts are doing more of the selling than your message.
2. 2Weak back-end monetization. Customers buy once and don't come back, so you keep paying to replace them.
3. 3Retention that doesn't improve profit per customer. Repeat orders come in, but only with an incentive attached.
4. 4Overpaying for traffic. Getting each new customer costs more than it used to.

If your email revenue is growing but your contribution margin isn't improving, you're probably too discount heavy or promotion dependent. That's also why we'd rather ask "did contribution margin improve?" than "how much revenue did email get credit for?" Here's how we think about email marketing ROI.

How Can Email Marketing Improve Your Contribution Margin?

Email should improve your contribution margin. Here are four ways we do it, and none of them need extra acquisition spend.

1. Stop giving discounts to people who would have bought anyway

Most abandoned cart and checkout flows send the same discount to first-time visitors and to returning customers. Returning customers already trust you. Often, they were going to come back and buy anyway.

Add a conditional split for people who have placed an order before. New visitors get the path that ends with a discount. Returning customers get a path that answers their questions instead. If you do offer them something, make it smaller and later. For example, 10% off for new customers and 5% off for returning customers. Here's how we split new and returning customers in an abandoned cart flow.

2. Stop paying for subscribers who hurt you

Klaviyo's email plans are priced on your number of active profiles and the emails you send, and profiles you suppress for email don't count as active (Klaviyo Help Center). A lower count doesn't lower your bill automatically, so check your plan after a cleanup.

For example, if you have 80,000 contacts and 60,000 of them haven't opened an email in six months and have never bought, you're paying for 60,000 profiles that make you nothing. Sending to them also tells Gmail and Yahoo that a big part of your list doesn't want your emails, which hurts inbox placement for your best customers too.

Suppress the people who are clearly not coming back. Your list gets smaller, but every send is worth more. That's better margin math. Here's our full email list cleaning process.

3. Build a campaign calendar that doesn't depend on discounts

Every discount email is a trade. You get revenue now, and you train customers to wait for the next deal.

Look at your campaigns from the last 30 days. If more than one or two out of every 10 to 15 emails had a discount, you're relying on incentives too much. Replace some of them with educational emails, behind the scenes content, social proof and problem to solution emails. Customers who trust you buy at full price, and every full price sale has a much higher margin.

We aim for one sales event a month at most, and for some brands far fewer. Here's what to send instead in our email marketing campaign strategy.

4. Segment, and don't discount your VIPs

A customer who bought from you three times in the last six months shouldn't get the same email as someone who signed up six months ago and never bought.

Start with four segments: engaged 30 days, engaged 60 days, engaged 90 days, and a VIP segment based on purchase frequency or lifetime value. Send your standard campaigns to the 90-day engaged segment. Give your VIPs early access and your best content, not a discount they don't need. Here's how we approach email segmentation.

Which Retention Metrics Feed Into Contribution Margin?

Contribution margin is the result. A few earlier numbers drive it:

1. 1Time to second purchase
2. 2First-to-second purchase rate
3. 3Customer lifetime value, especially in the first 30 days
4. 4Repeat revenue
5. 5Blended customer acquisition cost

When more customers come back for a second order, and come back sooner, you earn more from customers you already paid for. That lowers your blended acquisition cost, and that's what improves your contribution margin. Raising your average order value without discounting helps in the same way.

So How Do You Use Contribution Margin?

• Contribution margin = revenue minus variable costs. The ratio is contribution margin ÷ revenue.
• For ecommerce, count product costs, shipping, fulfillment, packaging and payment fees, and define it the same way every month.
• Gross margin only subtracts product costs, so it usually looks better than contribution margin.
• Contribution margin after marketing also subtracts marketing spend. It's the number we'd judge a brand by.
• There's no universal good contribution margin. Compare it with your own numbers over time.
• Email improves it by discounting less and smarter: no discounts for people who would buy anyway, a smaller list of people who engage, fewer sales events and segmented sends.

Revenue shows how big you are. Contribution margin shows whether growing is worth it.