What is Contribution Margin?
Gross margin gets the headlines. Contribution margin pays the bills. The two numbers look similar on paper, but they answer different questions, and the merchants who confuse them usually find out the hard way.
The formula
Contribution Margin = Revenue - All Variable Costs
Variable costs include COGS, payment processing fees, fulfilment costs, packaging, and any other expense that scales with the number of units sold. A $50 product with $20 COGS, $3 in payment fees, and $5 in fulfilment has a contribution margin of $22 per unit, or 44%.
Why it differs from gross margin
Gross margin only subtracts COGS. Contribution margin subtracts everything that scales per order. For most e-commerce stores, gross margin is 5-15 percentage points higher than contribution margin, depending on category and fulfilment model. A 40% gross margin product might only have a 28% contribution margin once payment fees and fulfilment are factored in.
That gap matters when setting pricing floors. A floor based on gross margin protects against losing money on COGS. A floor based on contribution margin protects against losing money overall, which is the actually-relevant question.
How to use it for repricing
The cleanest repricing floors use contribution margin, not COGS. "Never sell below 25% contribution margin" is a more honest constraint than "never sell below cost" because it accounts for the full variable cost of fulfilling each order. Stores that only enforce "never below cost" floors discover, eventually, that they have been technically profitable on COGS while losing money on every order once fees and fulfilment are added.
Example: A merchant sells a kitchen scale for $35 with $18 COGS, looking like a healthy 49% gross margin. Once $2.50 in payment fees, $4.20 in fulfilment, and $1 in packaging are subtracted, contribution margin is $9.30 per unit, or 26.6%. The merchant updates the repricing floor from "COGS + 30%" to "contribution margin minimum 25%" and discovers the rule was previously allowing prices that produced negative contribution margin on roughly 40 SKUs.