How to Calculate <blue>Contribution Margin</blue>

How to Calculate Contribution Margin: The Simple Formula and How Operators Use It‍

The fastest way to calculate contribution margin is to subtract your variable costs from your revenue. It matters because it shows how much money you keep after each sale. The main risk is misclassifying costs, which distorts every decision that follows.

TLDR

• Contribution margin equals revenue minus variable costs.
• It helps operators understand how much each sale contributes to profit.
• Best for teams that need fast, accurate decision support.
• The main risk is mixing fixed and variable costs.
  
  Contribution margin measures how much revenue remains after subtracting variable costs. It is a reliable way to judge product profitability and pricing efficiency. Onward uses contribution margin inside our growth, creative, and media models to help clients make faster, more confident decisions.

Key Facts

• Formula: Contribution Margin = Revenue minus Variable Costs
• Typical variable costs include cost of goods sold, shipping, packaging, payment fees
• Healthy contribution margins in DTC often range from 25 percent to 60 percent
• Teams with margin clarity scale 20 to 40 percent faster (Onward internal analysis, 2025)
• Misclassified costs are the number one reason margin math fails

1. The Problem: ROAS Creates False Confidence

Most teams use ROAS because ad platforms hand it to them. The problem is that ROAS ignores the real economics of the product. It does not include cost of goods, fulfillment, discounts, return handling, or payment fees.

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Why It Matters

Without margin clarity, operators scale campaigns that look good in a dashboard but lose money once true costs are included.

What Teams Miss

• Payment processing fees
• Shipping and packaging
• Production and handling
• Discount adjusted prices

The Onward Takeaway

ROAS is directional. Contribution margin is operational.

2. The Solution: Use Contribution Margin as Your Primary Profit Signal

Contribution margin solves the ROAS problem by showing the true dollars available after variable costs.

Contribution Margin = Revenue minus Variable Costs.

Variable costs are any costs that increase with each unit sold. Examples include cost of goods, packaging, shipping, payment fees, and returns handling.

Why Onward Uses This Metric

• It aligns directly with CAC decisions
• It scales across product lines
• It links marketing to finance
• It removes guesswork

3. How and Why It Works: A Step-by-Step Method

Step 1. Start With Net Revenue Per Unit
Revenue after discounts is your true starting point.

Step 2. List All Variable Costs
Variable costs increase with volume. Typical examples:

• Cost of goods
• Printing or production
• Shipping
• Packaging
• Credit card fees
• Marketplace fees
• Returns processing

Step 3. Subtract Variable Costs
If revenue is 30 dollars and variable costs are 18 dollars, contribution margin is 12 dollars.

Step 4. Convert to a Percentage
Contribution Margin Percentage = 12 divided by 30 equals 40 percent.

Step 5. Use Margin to Set CAC Targets
Your maximum CAC should not exceed your contribution margin unless you are intentionally breakeven for LTV expansion.

Step 6. Add LTV for Multi Purchase Models
Multiply contribution margin across expected lifetime orders.

4. Risks and Caveats: Where Teams Get Margin Wrong

1. Misclassifying Fixed vs Variable Costs - Mixing them produces misleading margin math.
2. Ignoring Discounts - Promo heavy businesses must calculate margin on realized revenue.
3. Missing Payment Fees - Payment fees can remove 2 percent to 4 percent of revenue.
4. Costs Not Updated Quarterly - COGS and shipping rates shift more than expected.
5. Using ROAS in the Same Model - ROAS pulls decisions in the opposite direction of profitable scale.

5. Alternatives and Comparisons‍

The Main Alternatives

• Gross margin
• Operating margin
• Net margin

Why Contribution Margin Wins

Gross margin is too broad. Net margin is too slow. Contribution margin is fast, precise, and actionable for CAC decisions.

FAQs

How do you calculate contribution margin?

Subtract variable costs from revenue. If revenue is 50 dollars and variable costs are 30 dollars, contribution margin is 20 dollars, or 40 percent.

What counts as a variable cost?

Any cost that increases with each unit sold. Common examples include cost of goods, packaging, shipping, payment fees, and fulfillment labor.

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What is a good contribution margin?

Most consumer brands target 30 percent to 60 percent. Below 25 percent makes scaling difficult without strong LTV.

How does margin affect CAC?

Your maximum CAC should not exceed your contribution margin unless you are intentionally acquiring customers at breakeven.

How often should margin be reviewed?

Quarterly for stable businesses. Monthly for fast moving brands.