In plain words
Contribution margin is what one order leaves you after every cost that the order itself causes. That means the product's unit cost, and also the warehouse's pick and pack, the box, the shipping label, the card fees and the share of revenue you set aside for refunds. Costs that don't change with one more order, like rent, salaries and software, are left out.
It is the right number for judging an offer, because an offer changes exactly these costs. A gift adds a unit cost and a pick. A bundle saves labels. Free shipping moves shipping revenue. None of that shows up in gross margin.
Formula
- Contribution margin = revenue − unit costs − fulfilment − shipping label − card fees − refund reserve
- Contribution margin % = contribution margin ÷ revenue
Worked example
A $40.00 bag of coffee, shipped free. The bag costs $12.00, pick and pack is $1.18, the box $0.50, the label $7.50, card fees $1.16 plus $0.30, and the refund reserve $2.00.
The engine puts the order's contribution margin at $15.36, or 38.4% of what the customer paid.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| cogs | per unit | −$12.00 |
| pick_pack | per order | −$1.18 |
| packaging | per parcel | −$0.50 |
| shipping | per parcel | −$7.50 |
| processing_fixed | per order | −$0.30 |
| refunds | percent | −$2.00 |
| processing | percent | −$1.16 |
| Gross margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Contribution margin is not gross margin
Gross margin subtracts only the cost of the goods. On the same bag it is 70%, almost twice the contribution margin, because it ignores shipping, fulfilment and fees. An offer judged on gross margin looks better than it is, and an offer that ships a lot of free parcels can have a healthy gross margin and a thin contribution margin.
Using it
Work it out per order and per option, not per product. The same product earns a different contribution margin as a single, in a bundle, with a gift or on a renewal, because each changes the fulfilment and the price. When a margin looks too good, check that shipping and card fees are in it: they are the costs most often left out.
In Offer Suite
Offer Suite's engine calls this figure the order's margin. Its field is named grossMarginCents for historical reasons, but it subtracts every cost kind the brand has entered, so by the usual definitions it is a contribution margin.
Source: Offer Suite's margin engine (packages/engine).