Contribution Margin
Definition
What is left from each sale after product cost and all the variable costs of selling it, such as marketplace fees, fulfillment, shipping, payment processing and ad spend. It is the money that actually covers overhead and profit.
Want a deeper explanation?
Formula
Contribution Margin = Net Sales − COGS − Variable Selling Costs (fees, fulfillment, shipping, ads)Gross margin can look great while the business still loses money, because marketplace fees, fulfillment and ads eat what is left. Contribution margin shows what each order really adds to the pot that pays rent, salaries and your own profit.
It is the right number for deciding which products, channels and campaigns to push. Watch for: a product with a strong gross margin but a thin or negative contribution margin once FBA fees and ad spend are included.
Example
A $50 order with $18 COGS, $9 fulfillment and fees, and $12 ad spend leaves $11 of contribution margin (22%).