# What is Contribution Margin?

What is Contribution Margin? Gross profit minus marketing, payment processing, and variable shipping costs.

## How it works in practice

Contribution margin is more 'financially honest' than gross margin. Gross margin excludes marketing fees, shipping, and payment processing fees. Contribution margin includes everything. If contribution margin is negative, every additional sale means a bigger loss.

## Related metrics

- Gross Margin — contribution margin is lower than gross margin
- COGS — factors into the contribution calculation
- CAC — high CAC lowers contribution margin on the first order
- Break-Even — contribution margin determines break-even

## Common misconception

'40% gross margin means we're making 40% profit.' No. 40% gross margin, after a 20% ad fee, 8% shipping, 3% processing, and 5% returns, becomes a 4% contribution margin. Many stores grow into losses because they never calculate this.

## How to fix it

Negative contribution margin? (1) Identify the biggest driver: CAC? shipping? COGS? (2) raise prices by 5-10% — usually doesn't hurt volume significantly, (3) reduce ad spend — improve CR before spending more, (4) increase AOV via a free-shipping threshold.

## Real-world example

A pet supply store: gross margin 42%, felt 'profitable.' Contribution analysis: CAC $27, shipping $5, processing $1, COGS $13, average price $42 = contribution -$4. Every order lost $4. Fix: raise the price $6 plus set free shipping at $55+.

## Where to start

Calculate contribution margin at least quarterly — by product and by channel. This calculation reveals whether your business is truly profitable or hiding a loss. A store growing gross revenue without growing contribution margin is heading toward bankruptcy.

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Category: Finance · From the [Jimmy OS KPI Glossary](https://jimmy-os.com/glossary/kpi.md) · Source page: https://jimmy-os.com/glossary/kpi/contribution-margin