How it's calculated
- Revenue = what the customer pays for products + shipping charged
- Contribution margin per order = revenue − unit cost × units − pick and pack − extra picks − packaging − label − card fees − refund reserve
- Contribution margin % = contribution margin ÷ revenue
- Break-even ROAS = revenue ÷ contribution margin: below it, the ad spend behind the order is more than the order keeps
Every figure on this page comes from Offer Suite's own margin engine, the same code the product uses to forecast each offer's and option's profit and to compute realized margin on orders. Money is computed in whole cents.
Worked example
A customer buys 2 bags of coffee for $72.00 and pays $5.00 shipping: $77.00 of revenue. The bags cost $24.00. The warehouse charges $1.18 to pick and pack the order and $0.20 for the second bag; the box is $0.50 and the label $7.50.
Card fees come to $2.23 plus $0.30, and $3.85 is set aside for refunds. All of it adds up to $39.76, so the order keeps $37.24, a contribution margin of 48.4%. Ads that return less than 2.07 times their spend cost more than this order keeps.
Assumptions
- The order ships in one parcel: one label, one box, one pick and pack, and one extra pick for each unit after the first.
- Tax is left out on both sides: it is collected for the state and is not revenue.
- Ad spend and overheads are not costs of the order. Contribution margin is what the order leaves to pay for them.
- Pick and pack $1.18 per order and $0.20 for each extra item are the defaults of the engine's DTC-US profile, a typical third-party warehouse contract. Use your own contract.
- The shipping label ($7.50) is an assumption for a domestic ground parcel of about a pound. Your carrier account or shipping app has your rate.
- Card processing of 2.9% + $0.30 is Shopify Payments' online rate for a standard card on the Basic plan in the United States. The Shopify Payments fees pages list every plan and country; enter yours.
- The refund reserve (5%) is a share of revenue set aside for refunds. Cost is not reduced by a refund, because the goods were already picked and shipped.
Questions
What is contribution margin per order?
What one order keeps after every cost that exists only because the order does: the products in it, the pick and pack, the box, the label, the card fee and the refunds expected on it. Rent, salaries and ad spend are paid out of it; they are not part of it.
What is the formula for contribution margin per order?
Revenue from the order, including shipping charged, minus its variable costs: unit cost times units, fulfilment, packaging, the shipping label, card processing and a refund reserve. Divide by revenue for the contribution margin percentage.
How is contribution margin different from gross margin?
Gross margin subtracts only the cost of the goods. Contribution margin also subtracts what it costs to fulfil and charge the order. A product at 70% gross margin can keep half of that once a label and a card fee come out of a small order.
How does contribution margin set an ad budget?
An order cannot pay more for its own acquisition than it keeps. Revenue divided by contribution margin is the return on ad spend at which the first order breaks even; a subscription or a repeat buyer can justify less, which the subscription payback calculator works out.