What Is Contribution Margin?
Contribution Margin is revenue minus variable cost per unit sold (COGS, payment fees, shipping, packaging, per-order discounts). It is the money each order actually contributes toward fixed costs, ad spend, and profit, and it sets the ceiling for what you can afford to pay in acquisition cost.
Formula
Include: COGS, payment processing, shipping paid, packaging, promo/discount cost, per-order returns reserve. Exclude: rent, salaries, software, agency fees (those are fixed).
Contribution Margin decides max CAC
A brand sells a 120 dollar AOV product. COGS is 42 dollars, shipping paid 8 dollars, payment fees 4 dollars, returns reserve 6 dollars. Variable cost per order = 60 dollars. Contribution Margin = 60 dollars. If payback target is first order, max CAC = 60 dollars. If the model tolerates 3-month payback and 40 percent repeat rate, effective max CAC rises to roughly 84 dollars. Confuse the two and you either underspend and starve growth or overspend and burn cash.
Benchmarks
- Healthy DTC CM per order: 40 to 60 percent of AOV after all variable costs.
- SaaS CM: often 75 to 90 percent (low variable cost) but constrained by payback.
- Info products / digital: 85 to 95 percent CM common.
Why it matters
CAC without CM context is meaningless. A 40 dollar CAC on a 30 dollar CM order is a loss on every acquisition; the same 40 dollar CAC on a 90 dollar CM order is a scaling opportunity. CM is the single input every serious ad buyer needs from finance.
Common mistakes
- 1.Using gross margin instead. Gross margin excludes shipping, fees, promos, and returns; CM is stricter.
- 2.Treating fixed costs as variable. Agency fees and software do not scale per order.
- 3.Ignoring returns reserve on high-return categories (apparel: 15 to 30 percent).
- 4.Setting max CAC = CM without accounting for repeat purchases. Leaves growth on the table.
Put Contribution Margin to work
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FAQs about Contribution Margin
Contribution Margin vs Gross Margin?
Gross margin = revenue − COGS only. Contribution margin adds every other variable cost (shipping, fees, returns). CM is stricter and more useful for CAC decisions.
Do I include free shipping in CM?
Yes. If you pay for shipping on the customer's behalf, it is a variable cost per order and belongs in CM.
Related terms
Total marketing + sales spend divided by new customers acquired.
Ad spend ÷ NEW customers; strips out repeat buyers that inflate CPA.
Months a new customer takes to earn back their CAC in contribution margin.
Total gross profit a customer generates across their relationship.
Lifetime value ÷ acquisition cost, the unit-economics gate for scaling.
The ROAS at which ad spend equals contribution margin; below this you lose money on every sale.
% of customers still active after a given time window.