The contribution margin answers the question that no revenue statistic answers: what is left of a sale once everything that sale triggered has been paid? That amount is available to cover the fixed costs. Only what remains after that is profit.
Calculating the contribution margin: the formula
Contribution margin = net revenue − variable costs
Contribution margin per unit = net selling price − variable costs per unit
Contribution margin ratio = contribution margin ÷ net revenue × 100
The calculation uses net values. The VAT the customer pays is passed on to the tax office; it is not revenue. At 19% VAT, EUR 59.50 gross becomes EUR 50.00 net.
Which costs are variable in online retail
Variable costs are those that arise with every sale and would not be incurred without it. In online and marketplace retail, these are above all:
- Cost of goods: the purchase price of the goods sold, including procurement costs such as freight and customs duties.
- Selling fees: the marketplace's commission or the payment fee in your own shop. The basis of calculation differs by channel, see for example OTTO commission, Amazon seller fees or payment fee.
- Shipping and packaging: what you pay your parcel carrier and for materials.
- Returns: the outbound shipping of the parcel that comes back, the return shipping, inspection and the loss in value when goods are no longer fully saleable. Whether fees come back on a refund depends on the channel.
- Advertising: ad costs, as far as they can be attributed to an item. General brand advertising with no link to an item belongs rather to the costs of the period.
Fixed costs that are incurred even without an individual sale do not belong in the contribution margin per item: monthly marketplace base fees, software, rent, staff. You deduct a marketplace's base fee one level higher, pro rata in the contribution margin of that channel for the period (see below).
Example 1: contribution margin per unit
An item sells for EUR 59.50 gross. All costs are assumptions; insert your own values.
| Line item | Assumption | Amount |
|---|---|---|
| Net selling price | EUR 59.50 ÷ 1.19 | EUR 50.00 |
| – Purchase price | net | −EUR 20.00 |
| – Commission | 15% of the gross price | −EUR 8.93 |
| – Shipping and packaging | per parcel | −EUR 4.50 |
| Contribution margin per unit | ratio 33.1% | EUR 16.57 |
Commission EUR 59.50 × 15% = EUR 8.925, rounded to EUR 8.93. Ratio: EUR 16.57 ÷ EUR 50.00.
That is the contribution margin of a sale that the customer keeps and that came about without advertising. For a realistic month, returns and ads are still missing.
Example 2: a month with returns and advertising
The same item, with additional assumptions:
- 100 orders of one unit each, 20 of them returned
- On a return, the purchase price and the commission are refunded. This is an assumption: on some channels parts of the fees are retained, for example with the eBay final value fee.
- Return shipping EUR 5.00 per return, loss in value 10% of the purchase price (EUR 2.00)
- Advertising costs for this item: EUR 150.00 per month
| Line item | Calculation | Amount |
|---|---|---|
| Net revenue of the items kept | 80 × EUR 50.00 | EUR 4,000.00 |
| – Cost of goods | 80 × EUR 20.00 | −EUR 1,600.00 |
| – Commission | 80 × EUR 8.925 | −EUR 714.00 |
| – Shipping of all parcels | 100 × EUR 4.50 | −EUR 450.00 |
| – Return shipping | 20 × EUR 5.00 | −EUR 100.00 |
| – Loss in value on returns | 20 × EUR 2.00 | −EUR 40.00 |
| – Advertising | assumption | −EUR 150.00 |
| Contribution margin | ratio 23.7% | EUR 946.00 |
Ratio: EUR 946.00 ÷ EUR 4,000.00 = 23.65%. Per unit kept: EUR 946.00 ÷ 80 = EUR 11.83.
The EUR 16.57 per unit from Example 1 becomes EUR 11.83 per unit kept. The difference lies in the outbound shipping of the parcels that came back (EUR 90.00), in the return shipping, in the loss in value and in the advertising. If the fixed costs of the month for this business are EUR 800.00, EUR 146.00 profit before tax remains.
CM I, CM II and further levels
In multi-level contribution margin accounting (CM I, CM II and so on), costs are deducted step by step, from the item up to the company:
- CM I = net revenue − variable costs
- CM II = CM I − fixed costs that can be attributed directly to a product or a product group, for example photos and product copy for that group or storage space rented solely for it
- Further levels deduct the fixed costs of larger areas, such as a channel. After the fixed costs of the company as a whole, what remains is the operating profit.
A typical case for the channel level is a marketplace's monthly base fee. It is not tied to any item, but it belongs to the channel's result. You deduct it pro rata: the full amount for a full month, the share by days for a shorter period. With the OTTO base fee of EUR 99.90, that is EUR 99.90 × 10 ÷ 30 = EUR 33.30 for 1 to 10 September.
In online retail the levels are often cut differently, for example CM I after cost of goods, CM II after fees, shipping and returns, CM III after advertising. There is no binding standard for this. What matters is that each level states which costs have already been deducted.
How does it differ from margin and profit?
Margin is an umbrella term. The gross margin deducts only the purchase price from the net price; in the example above that is 60%. The contribution margin ratio deducts all variable costs and is therefore considerably lower, at 33.1% per unit and 23.7% for the month. Formulas and conversion are in the Margin entry.
Profit sits one level above: it only arises once the sum of all contribution margins also covers the fixed costs. That is why a month with decent contribution margins can still end in the red, and an item with a positive contribution margin is not yet proof of a profitable business.
How much advertising an item can bear before the contribution margin is used up is shown by break-even ACOS and break-even ROAS.
Why per item rather than as an average?
An average across the entire catalogue hides what you want to know. Items with high revenue can contribute little because of returns or advertising, others contribute a lot on small revenue. That only becomes visible once fees, purchase costs, returns and advertising are attributed to the individual item.
Across several channels, a second effect comes into play: the same item can earn well on one marketplace and not on another, because commission, shipping rules and return behaviour differ.
Contribution margin per item across all channels
profitkonsole takes orders and settlement data from the connected channels, sets them against your purchase, shipping and return costs and your advertising, and calculates the contribution margin per item, per product group and per channel.
Read on: Which KPIs are missing from the seller portal and how you calculate them →
Contribution margin, not revenue
Every sales channel in one dashboard: marketplace data and your own costs brought together, per item and per channel.