The eCommerce Accountant’s Guide to Contribution Margin

If you're in marketing or working at bigger companies, you've probably butted heads with finance folks more than once. 

You know the drill: your accounting department gives you the side-eye when you want to spend money on something they think is just fluff.

I see it all the time. Accounting departments get tunnel vision looking at Google Analytics and last-click attribution when making budget calls. 

It's damn frustrating when you don't have everyone rowing in the same direction.

But here's the thing - we're all trying to win for the brand. We just speak different languages sometimes. 

There's this weird gap between how marketing people think about money and how finance people think about marketing.

If you can start speaking their language and understanding what makes them tick, everything changes. 

When those dots connect, suddenly everyone gets why we're doing what we're doing.

And that’s what we are doing today, trying to teach you the forgotten language to win over the finance folks.

What is The Contribution Margin?

Contribution margin is the cash you have left after paying all your variable expenses - and it's what you use to cover your fixed costs.

Think about it this way: when your revenue doubles, your variable expenses pretty much double too. 

Whatever's left after that? That's your contribution margin, and it better cover your fixed expenses or you're screwed.

Contribution Margin Formula

How to calculate contribution margin? You use the simple formula:

This isn't just some academic bullshit. It determines whether you can scale or not. It tells you the minimum activity your business needs just to survive.

Your contribution margin isn't enough to cover fixed expenses? Congratulations, you're losing money.

Everyone loves to talk about revenue in presentations, and yeah, revenue matters. But a solid contribution margin? That's what keeps the lights on.

Now a quick detour into fixed versus variable costs, I promise it’s important.

Fixed vs. Variable Costs

All the costs and expenses in your business can broadly be divided into two buckets:

1. Fixed Costs: These stubborn bastards don't change whether you're killing it or bombing. Your rent stays the same whether you make a million bucks or ten bucks.
2. Variable Costs: These move up and down as your revenue does. More sales? More transaction fees. Less sales? Less fees.

Let me break it down:

If you double your revenue, do you double your transaction fees? Hell yes, you will.

Do you double your ad spend? Usually, you'll more than double it. That's just the brutal reality of diminishing returns.

Do you double UGC costs? Probably not; you'll find a few winners and scale those, but you're not going to double your entire content budget.

Do you double your email marketing expenses? Generally no. Klaviyo might bump you up a tier, but sending to 10 people or 10,000 people costs basically the same.

Do you double your payroll? Usually not. Maybe you need another customer service person, but you don't need two CEOs.

Do you double your software costs? Some will go up, but most won't budge.

Now you might be thinking, "Why the hell are we talking about fixed and variable costs?" 

Because without understanding this distinction, you'll never grasp the power of contribution margin.

So What Counts as Variable Expenses?

It can be difficult figuring out what's variable and what's fixed, but here are the usual suspects:

• Ad Spend: Directly linked to sales.
• Shipping Expenses: Varies with sales volume.
• Transaction Fees: Depends on the number of sales.
• Software Costs: If they scale with ad spend.
• Agency Fees: Especially those with a performance component.
• Influencer Costs: If compensation is tied to ad spend behind their content.

Contribution Margin Example Use Case

Let me tell you a story with numbers (because I'm an accountant and this is how I get my kicks).

We have a brand with the following baseline metrics:

• Blended ROAS: 4
• Ad Spend: $250,000
• Revenue: $1,000,000 (no discounts)
• Cost of Goods Sold (COGS): 30% of revenue ($300,000)
• Gross Profit: $700,000 ($1,000,000 - $300,000)
• Contribution Margin: $450,000 ($700,000 - $250,000)
• Fixed Costs: $300,000
• Profit: $150,000 ($450,000 - $300,000)

So that's my baseline scenario.

When ROAS Tanks

So Zuckerberg wakes up one day and decides to mess with the Meta algorithm.

Suddenly your ROAS drops from 4 to 3.

Same ad spend, but now your gross profit is only $525,000 instead of $700,000. That means your contribution margin is $275,000.

Your fixed costs don't give a damn about your problems - they stay at $300,000. Now you're losing $25,000.

What do most brands do in this situation? They panic and say, "My target ROAS is 4, so I need to cut ad spend to get back to that."

So let's say they make that decision.

So they slash ad spend from $250,000 to $150,000. Their ROAS goes back up to 4 - hooray! 

But wait... their gross profit drops to $420,000 because they're selling less overall.

Their contribution margin is now $270,000. They've actually made things worse - they're losing even more money now.

They've got a prettier ROAS number, but who cares? You could have a ROAS of 50, but if your contribution margin is too small, you're still screwed.

And this is where the death spiral starts. Less ad spend today means fewer customers, which means less of a halo effect on your organic traffic, which means your blended ROAS might start dropping even more.

The Counterintuitive Move

So what does the brand owner who actually understands this shit do? They increase their ad spend.

"Are you high?" you might be thinking. "If I increase ad spend when ROAS is tanking, won't that make things worse?"

The real question is: how much worse? Are you dropping to a ROAS of 1.1, or is there a sweet spot?

Let's say our brand increases ad spend from $250,000 to $350,000, and ROAS drops further to 2.65. 

This specific calculation shows that despite the ROAS drop, the contribution margin can still cover fixed expenses - they break even.

Is it always this clean? Hell no. You might drop to a 1.1 ROAS if you jack up spend too much.

But this illustrates why obsessing over ROAS or revenue alone is shortsighted. It's all about contribution margin.

Sure, you can also try to cut fixed costs - downsize your office, ditch software, lay people off. But those decisions suck to make and take forever to implement.

What you can affect week-to-week or month-to-month is your contribution margin and variable expenses - tweaking ad spend, refining offers, driving revenue.

That's why contribution margin isn't just some accounting term - it's the key to making decisions that don't tank your business.

Gross profit vs Gross margin

These two concepts are closely related but slightly different.

• Gross Profit: The money you're left with after paying for the actual products you sold. Revenue minus cost of goods sold. Simple.
• Gross Margin: Your gross profit divided by net revenue, shown as a percentage. It tells you what chunk of your revenue is actually profit after paying for your stuff.

Here’s a quick example:

• July 2025:
  
  • Gross Sales: $100,000
  • Discounts: $10,000
  • Net Sales: $90,000 ($100,000 - $10,000)
  • COGS: $30,000
  • Gross Profit: $60,000 ($90,000 - $30,000)
  • Gross Margin: 67% ($60,000 / $90,000)
• August 2025:

Say we run a massive promo that boosts sales by 20% but we have to triple our discounts:

• New Gross Sales: $120,000
• New Discounts: $30,000
• Net Sales: $90,000 ($120,000 - $30,000)

So we tripled our discounts that month, but look - our net sales are exactly the same at $90k.

Why should you give a damn about this? 

Because most brands are obsessed with net sales and nothing else.

ROAS - everyone's favorite metric - is just net sales divided by ad spend. That's it. 

It completely ignores your cost of goods sold, which is what actually determines if you're making money.

Look at what happened here: same net sales both months, but our COGS jumped up because we sold more actual units. More units = more costs. 

So our gross profit dropped by $6,000 and our margin fell 7 percentage points.

Even if you "know" this stuff already, keep it front of mind when you're talking about marketing performance. Because shifts in gross margin have real consequences for your bottom line.

Think about it - your brand probably has some target ROAS like 2.2 or whatever. 

But does that target shift when you run a bundle promo? When you throw in free gifts? When you offer free shipping? When you slash prices by 40%? 

It bloody should, because all those things change your margins.

You can hit your ROAS target all day long and still be bleeding money 

If you're not watching your margins at least. ROAS won't show you that - but your bank account will.

Contribution Margin vs. Gross Margin: Why the Difference Matters

You already know gross margin—it’s the profit left after paying for the products you sold (Revenue – COGS). But contribution margin goes deeper. It answers: "After covering ALL variable costs (not just COGS), how much cash is left to pay fixed expenses and generate profit?"

The Key Difference

Contribution margin isn’t a "set it and forget it" number—it’s your business’s pulse. Too low, and you’re on life support. 

Too high, and you might be leaving growth on the table. So what’s the magic number?

The Short Answer

• <10%: You’re in the danger zone. Fixed costs will eat you alive.
• 10–20%: Survivable, but scaling will feel like running in quicksand.
• 20–30%: Healthy. You’ve got room to maneuver.
• 30%+: Elite. Profit fuels growth instead of debt.

But here’s the truth: There’s no universal "good" margin. It depends on your business model:

Try My Contribution Margin Calculator 

I've built a tool that puts all this contribution margin theory into practice. I've shared it with tons of brands, and I'll hook you up with it at the end.

For now, let me walk you through it to show how these concepts can be put into practice.

Here are some screenshots of the tool, which is actually a Google Sheet.

The tool works like this: you input your variable expenses, such as the percentage of cost of goods sold, shipping, transaction fees, and other related costs… 

The calculator then shows you exactly how much contribution margin you're getting per order.

This isn't just number-crunching for fun. It shows you in black and white how different expenses are eating into your margins so you can make decisions that actually improve profitability.

For instance, you can see that with a $40 customer acquisition cost and a $65 average order value, you're basically at break-even.

Or if your AOV jumps to $85, you can afford to spend up to $52 to acquire a customer before you start losing money.

This lets you run different scenarios to figure out what a truly profitable order looks like for your business.

But here's where it gets interesting - sometimes a smaller contribution margin can be way better for your bottom line. Check this out:

Would you rather make $5 contribution margin per order but sell 10,000 units for a total of $50,000? Or make $50 per order but only sell to 100 people for a total of $5,000?

It's a no-brainer, right? But too many brands get hung up on margin percentages without looking at the total dollars.

You can take this even further by factoring in your fixed expenses. The calculator helps you determine at what ROAS level and what ad spend you actually hit profitability.

This isn't just theoretical bullshit - it's practical math that helps you make better decisions about your marketing and operations. 

When you start thinking in terms of contribution margin, you stop making decisions that look good on paper but kill your business in reality.

A “good” contribution margin is one that keeps your business alive while funding growth. If yours doesn’t, quit staring at ROAS and start surgically fixing the leaks.