Contribution margin is the amount each unit sold contributes towards covering fixed costs and generating profit. It is calculated by subtracting variable costs from the selling price.
Contribution margin is the amount each unit sold contributes towards covering fixed costs and generating profit. It is calculated by subtracting variable costs from the selling price.
Contribution Margin = Selling Price − Variable Costs Contribution margin isolates the profit potential of each individual sale by removing only the costs that vary with each unit sold. Unlike gross margin, which looks at totals, contribution margin is inherently per-unit. It tells you which products carry their weight and which ones barely cover their own costs. Products with high contribution margins are your workhorses: they fund your fixed expenses and drive overall profitability.
Contribution Margin = Selling Price − Variable Costs You sell a t-shirt for £35. The product costs £12, shipping costs £3, and transaction fees are £2. Your contribution margin is £35 − £12 − £3 − £2 = £18. Each t-shirt contributes £18 towards your fixed costs and profit.
Contribution margin lets you compare products on an apples-to-apples basis. A £100 product with a £15 contribution margin is less valuable than a £40 product with a £20 contribution margin. It directly informs pricing, bundling, and discontinuation decisions.
Confusing contribution margin with gross margin — contribution margin includes all variable costs, not just COGS
Ignoring variable costs like payment processing fees and pick-and-pack labour
Using contribution margin percentages without considering absolute values
StoreLyst calculates contribution margin per product and per variant automatically, factoring in COGS, shipping costs, and transaction fees. You can sort your catalogue by contribution margin to focus on your most profitable items.
Learn more about P&L Reporting →Gross margin only subtracts COGS from revenue. Contribution margin subtracts all variable costs, including shipping, transaction fees, and any per-order costs. Contribution margin is a more complete per-unit profitability measure.
Yes. If your variable costs per unit exceed the selling price, every sale loses money before fixed costs are even considered. This requires immediate action: raise prices, reduce variable costs, or discontinue the product.
Set your price so the contribution margin comfortably covers a proportional share of fixed costs plus your desired profit. If your fixed costs are £3,000 per month and you sell 300 units, each unit needs at least £10 contribution margin to break even.
Both matter. A high percentage means the product is efficient, but absolute amount determines how much cash it generates. A £200 product with 25% margin (£50) generates more cash than a £20 product with 60% margin (£12).
Stop calculating in spreadsheets. Get real-time contribution margin tracking for your Shopify store.