What Is Contribution Margin?
6 min read · Updated 2026-06
Definition
Contribution margin tells you how much each sale contributes toward covering fixed costs and generating profit. It subtracts all variable costs from the selling price.
Formula
Contribution Margin = ((Selling Price − Variable Costs) ÷ Selling Price) × 100
Variable Costs = COGS + Shipping + Packaging + Payment Fee per unit
Example
You sell a candle for $28. Here is what each sale costs you:
- Product cost (wax, wick, jar): $5.50
- Box and packaging: $1.80
- Shipping: $4.20
- Payment processing (2.9% + $0.30): $1.11
- Total variable costs: $12.61
- Contribution: $15.39 → 55% margin undefined
Each candle sale contributes $15.39 toward fixed costs. If fixed costs are $8,000/month, you need 520 candles ($14,560 revenue) to break even.
Common Mistakes
- Forgetting payment fees in variable costs. On a $28 product, that $1.11 fee seems small. Across 1,000 sales it is $1,110.
- Treating all products the same. Your $50 product might have 60% contribution while your $20 product has 25%.
- Including fixed costs in the calculation. Shopify subscription and salaries are fixed. Do not include them here.
Industry Benchmarks
- Luxury goods: 60–75%
- Beauty & personal care: 55–70%
- Fashion: 40–55%
- Electronics: 15–30%
- Food & grocery: 10–25%
FAQ
What is the difference between contribution margin and gross margin?
Gross margin subtracts only COGS. Contribution margin subtracts COGS plus variable costs like shipping, packaging, and payment fees per unit.
What is a good contribution margin?
Above 40% is healthy. Below 20% means each sale barely covers its own costs. Digital products often hit 80–90%.
How do I use contribution margin for pricing?
Work backwards. If you need 50% and variable costs are $15/unit, price needs to be at least $30.
Should I drop products with low contribution margins?
Not necessarily. If a low-margin product drives repeat purchases of high-margin products, keep it. Otherwise, drop it.
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