What Is Contribution Margin? How is it Calculated? | Jirav

What is Contribution Margin?

Contribution Margin is a financial metric that measures the amount of money left over after covering variable costs. It's the amount of money that contributes towards covering fixed costs and generating a profit.

In simple terms, Contribution Margin is the difference between revenue and variable costs. It's expressed as a percentage or a dollar amount.

Why Contribution Margin Is Important

Contribution Margin is an essential metric for ecommerce companies for several reasons:

• Knowing the contribution margin helps companies make informed pricing decisions. By understanding how much of each sale contributes to covering fixed costs and generating a profit, companies can set prices that ensure profitability.
• Contribution Margin helps ecommerce companies keep variable costs under control. By identifying the variable costs that make up the most significant proportion of the total cost, ecommerce companies can identify where to focus their efforts to reduce expenses.
• Contribution Margin helps ecommerce companies improve their profitability. By knowing which products or services generate the highest contribution margin, companies can focus on promoting and selling these products or services.

How to Calculate Contribution Margin

Contribution Margin is calculated using the following formula:

Contribution Margin = Revenue - COGS - Commissions - Paid Marketing Spend

The contribution margin can be expressed as a percentage, by dividing the contribution margin by revenue:

Contribution Margin Percentage = (Contribution Margin / Revenue) x 100

Suppose an ecommerce company sells a product for $100. The variable cost per unit is $60. Therefore, the Contribution Margin per unit is $40 ($100 - $60). The Contribution Margin percentage is 40% ($40 / $100 x 100).