What Is Contribution Margin? Formula, Worked Example & Cost Breakdown (2026)

Contribution margin is what's left from each sale after subtracting all variable costs — the money that first covers your fixed costs (rent, salaries, software) and only then becomes profit. The formula is price minus per-unit variable cost; it can also be shown as a percentage of price (contribution margin ratio). It's stricter than gross margin because it folds in every cost that scales with sales — platform commission, payment fees, shipping.

The formula

Contribution margin per unit = Price − Variable cost per unit

Contribution margin ratio = (Contribution margin per unit / Price) x 100%

Variable cost = anything that rises with each additional unit sold (cost of goods, platform commission, payment fees, shipping, packaging, return losses, etc.). Fixed costs do not go in this formula.

Worked example

A product sells for 30 dollars with these variable costs: cost of goods 10, platform commission (about 8%) 2.40, payment fee 0.90, shipping + packaging 3.70, and a returns-loss allowance of 1:

Total variable cost per unit = 10 + 2.40 + 0.90 + 3.70 + 1 = 18 dollars Contribution margin per unit = 30 − 18 = 12 dollars Contribution margin ratio = (12 / 30) x 100% = 40%

So each unit sold contributes 12 dollars toward fixed costs, and only after those are covered do you make a profit. To run this with your own numbers, use our free profit calculator.

Which variable costs to subtract

For TikTok Shop's commission and fee structure, see the fees and margin breakdown.

How contribution margin relates to other metrics

Contribution margin is the core of per-order earning power, while sell-through rate is how fast you sell. Read them together: high sell-through with thin contribution margin can just mean selling at a loss for volume. It also explains why lifting AOV alone isn't the same as making money — if the higher basket comes from discounts, the contribution margin ratio drops. Net profit = total contribution margin − fixed costs, so contribution margin is what tells you how many more units you need to sell to break even.

Frequently asked questions

Is contribution margin different from gross margin? Yes. Gross margin usually subtracts only cost of goods (COGS); contribution margin subtracts all variable costs, including platform commission, payment and shipping. So contribution margin better reflects the true per-unit earning power of an ecommerce order.

What's the difference between contribution margin and net profit? Contribution margin is after variable costs but before fixed costs; net profit is after fixed costs and taxes too. A positive contribution margin does not guarantee a positive net profit.

What contribution margin ratio is healthy? It depends on category and model — there's no universal line. You generally want it high enough to cover fixed costs at a realistic sales volume and still leave profit. A negative ratio means you lose money on every unit and must reprice or cut costs immediately.

How do I use it to find break-even? Break-even units = Fixed costs / Contribution margin per unit. For example, 6,000 dollars monthly fixed cost divided by a 12-dollar contribution margin means you need to sell 500 units to break even.

Only by entering every variable cost do you learn whether a unit actually earns. Work out your contribution margin with our free profit calculator.