October 28, 2025
If you’re running an eCommerce brand, you’ve probably thought something like this: “I sell my product for $50, it costs me $20 to make,so my margins are great, ”
It’s very common to solely look at the simple math (sale price minus cost of goods sold) and assume you’re ready to gameplan.But that math doesn’t account for other variable costs. Things like shipping costs, fulfillment, transactional fees, and ad spend are all things that affect the actual profitability of each individual sale, and should be approached accordingly.
This is where Contribution Margin Comes into play…it is the ultimate stabilizer of business health.
If you don’t know your true Contribution Margin, scaling can be tricky. Brands that try to scale solely on Top-line Revenue, or Gross Margin alone can wake up after months to realize their P&L has slowly crept into the red. Contribution Margin gives you the true profitability picture so you can confidently decide where to put your marketing dollars.
Key Metrics/What to Measure
1. Calculate It:
Contribution Margin = (Revenue – Variable Costs) ÷ Revenue
Variable costs include COGS, shipping, fulfillment fees, and marketing spend.
2. Set Guardrails:
Define your minimum acceptable contribution margin to maintain healthy unit economics. This gives you clarity when deciding which campaigns and products are worth scaling. (For many brands, 30% is a good starting point.)
3. Prioritize SKUs for Paid Advertising:
Products with Higher Contribution Margin in most scenarios will be the main candidates for scale. Lower Contribution Margin Products usually are best utilized with a focus on Organic Sales and/or Bundling with Higher CM% Products.
4. Scenario Model:
Build a simple spreadsheet that accounts for all costs, with adjustable goals for CAC, Discount Levels, Fulfillment Costs, and Volume. This helps guide next steps based on what offers and products could or should be scaled, as well as what to avoid.
5. Monitor Over Time:
Track monthly contribution margins to spot when rising ad costs are eating up profitability. This is your guiding light of knowing when to push, and when to pull back.
Contribution margin is the single most important number for scaling profitably. If you only track gross margin, you risk scaling ads that look good on paper but drain cash in reality.
If you’re not sure which products can support profitable ad spend, we can help! Our team builds contribution margin models that make scaling decisions simple, so you know exactly which initiatives to push and which to pause.
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