# What is contribution margin?

> Contribution margin is what each sale leaves after variable costs like product, shipping and fees. Formula, a worked example in rupees and how it sets ad limits.
- **Author**: Marxx
- **Published**: 2026-11-17
- **Category**: Metrics
- **URL**: https://marxx.ai/library-glossary/contribution-margin

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Contribution margin is the money left from a sale after you pay every cost that grows with each order. It is the amount that pays for your ads and then your fixed costs. If an order brings INR 2,000 and variable costs take INR 1,000, your contribution margin is INR 1,000.

## The formula

Contribution margin = revenue − variable costs

Variable costs are the ones you pay again with every order: the product, packing, shipping, payment fees and returns. Rent and salaries are not variable. Ads are a cost too, so show contribution margin both before ads and after ads.

## A worked example

Say you sell a INR 2,000 order (the price after tax). The numbers are made up.

| Line | Amount |
|---|---|
| Order value | INR 2,000 |
| Product cost | INR 700 |
| Packing and shipping | INR 150 |
| Payment fees | INR 50 |
| Returns and refunds | INR 100 |
| **Contribution margin before ads** | **INR 1,000** |

That is 1,000 / 2,000 = **50%**.

Now add the ad cost. You pay INR 600 in ads to win one customer ([CAC](/glossary/cac)).

- Contribution margin after ads = 1,000 − 600 = **INR 400** per order
- The break-even cost per order is INR 1,000. Spend more than that and you lose money.

## How it sets your ad limits

Your break-even ROAS is revenue / contribution margin before ads. Here that is 2,000 / 1,000 = **2.0**. At ROAS 2.0 your ads just pay for themselves. Above 2.0 you earn. See [break-even ROAS](/glossary/break-even-roas). Use the free [ROAS calculator](/roas-calculator) to try your own numbers.

## Contribution margin vs gross margin

Gross margin usually subtracts only the product cost. Contribution margin also takes out shipping, fees and returns. For a shop that ships parcels, it shows more of what you keep. [POAS](/glossary/poas) uses profit in place of revenue and gives a similar view.

## FAQ

### Is contribution margin the same as profit?

No. It is what remains before fixed costs such as rent, salaries and software. You need enough contribution margin to cover those too.

### Should ad spend count as a variable cost?

Yes, for a full picture. Show it both ways: before ads, to set your limits, and after ads, to see what each order earns you.

### How do I raise contribution margin?

Cut returns, negotiate shipping, raise [AOV](/glossary/aov) with bundles, or lift prices. Each adds rupees to every order.

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