Contribution Margin

What This Page Answers

Contribution margin measures how much revenue remains after variable costs. It is one of the most important numbers for paid media profitability. Contribution margin tells you how much money is available to pay for acquisition and still create profit.

Formula

Contribution margin = (revenue - variable costs) / revenue

Example:

$100 revenue - $60 variable costs = $40 contribution
$40 / $100 = 40% contribution margin

Why It Matters

Contribution margin connects ad performance to profit. If contribution margin is 40%, every $100 order creates $40 before acquisition cost. Spending $50 to acquire that order loses money on the first purchase.

Break-Even ROAS

Contribution margin determines break-even ROAS:

Break-even ROAS = 1 / contribution margin

At 40% contribution margin:

1 / 0.40 = 2.5 break-even ROAS

Variable Costs To Include

  • Cost of goods sold

  • Payment processing

  • Shipping and fulfillment

  • Returns

  • Discounts

  • Platform fees

  • Sales commissions

  • Direct support costs where relevant

Use contribution margin to:

  • Set ROAS targets.

  • Decide acceptable CPA.

  • Compare products with different economics.

  • Allocate budget by category.

  • Decide whether to scale or pause campaigns.

  • Evaluate promotions.

  • Model payback period.

Practical Rule

Contribution margin is the bridge between marketing metrics and finance. Without it, ROAS targets are guesswork.