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Do Most Ecommerce Products Actually Lose Money?
Revenue is vanity.
Quick Answer: How do you find which products make money?
Use the contribution margin formula: Revenue minus Variable Costs. A healthy DTC brand targets a 50-65% CM ratio. Below 40% is a warning sign. Calculate CM per unit for every SKU, then divide by the selling price to compare products at different price points and find your real profit drivers.
That sounds harsh. But we audit Shopify stores every week, and the pattern is always the same — founders know their top-line revenue but cannot tell you which products actually contribute to profit.
The contribution margin formula fixes that. It strips away the noise and shows you, product by product, what is left after variable costs. No accounting degree required. Just one equation and the willingness to look at numbers that might be uncomfortable.
Here is how to use it — and what to do when the numbers are worse than you expected.
What Is the Contribution Margin Formula?
Contribution margin is the revenue left over after you subtract all variable costs directly tied to producing and selling a product. It is the money that "contributes" to covering your fixed costs (rent, salaries, software) and eventually generating profit.
The formula:
Contribution Margin = Revenue - Variable Costs
Variable costs include everything that scales with each unit sold:
- Cost of goods sold (COGS) — materials, manufacturing, wholesale price
- Shipping and fulfillment costs
- Payment processing fees (typically 2.5-3.5%)
- Marketplace commissions (if applicable)
- Packaging materials
- Sales commissions or affiliate payouts
Fixed costs like Shopify subscriptions, warehouse rent, and salaried staff are excluded. Those exist whether you sell one unit or ten thousand.
Here is a worked example. Say you sell a skincare kit for RM 180:
| Line Item | Amount |
|---|---|
| Selling price | RM 180 |
| COGS (product + packaging) | RM 52 |
| Shipping & fulfillment | RM 18 |
| Payment processing (3%) | RM 5.40 |
| Total variable costs | RM 75.40 |
| Contribution margin | RM 104.60 |
That RM 104.60 is what this product contributes toward your fixed costs and profit. If your fixed costs total RM 30,000 per month, you need roughly 287 units of this product to break even — before you see a single ringgit of profit.
Run your own numbers through the Contribution Margin Calculator to see where each product stands.
Why Does the Contribution Margin Ratio Matter More?
The raw contribution margin number is useful. The contribution margin ratio is more useful for comparing products against each other.
Contribution Margin Ratio = (Contribution Margin / Revenue) x 100
Using the skincare kit example: (104.60 / 180) x 100 = 58.1%
That means 58 cents of every ringgit goes toward covering fixed costs and profit. The other 42 cents covers variable costs.
Why does the ratio matter more than the dollar amount? Because it lets you compare products at different price points.
| Product | Price | CM | CM Ratio |
|---|---|---|---|
| Skincare kit | RM 180 | RM 104.60 | 58.1% |
| Face serum | RM 85 | RM 55.25 | 65.0% |
| Travel set | RM 120 | RM 42.00 | 35.0% |
The face serum has the lowest raw margin but the highest ratio. Every sale converts more revenue into contribution. The travel set looks decent at RM 42 per unit, but at 35% it is your weakest performer — and if you are spending ad dollars to push it, the economics may not work at all.
According to Harvard Business School's analysis of contribution margin, understanding this ratio is essential for making pricing, product mix, and discontinuation decisions. We see this in practice constantly. Stores that track CM ratio make better decisions about which products to promote and which to phase out.
How Do You Calculate Break-Even From Contribution Margin?
Once you know your contribution margin per unit, break-even analysis becomes simple arithmetic.
Break-Even Point (units) = Fixed Costs / Contribution Margin Per Unit
If your monthly fixed costs are RM 30,000 and your average contribution margin per unit is RM 80:
30,000 / 80 = 375 units per month to break even
Everything above 375 units is profit. Everything below is a loss.
This is where most DTC brands get surprised. They look at revenue — "We did RM 60,000 this month!" — without realizing they needed RM 67,500 in revenue just to cover costs. As Tanner Larsson outlines in Ecom Evolved, the brands that scale profitably are the ones that know their unit economics before they scale their ad spend. Scaling a product with thin margins just accelerates the losses.
Does this sound like your store? Find out where you're leaking revenue — take the free Revenue Score. 3 minutes. Free. No pitch.
How to Improve Your Contribution Margin
If your margins are thinner than you expected, here are four moves we recommend to our clients. Many of these tie directly into conversion rate optimization — because improving margins and improving conversions compound together.
1. Renegotiate COGS
Your cost of goods is usually your largest variable cost. Suppliers expect negotiation — especially at volume. A 10% reduction in COGS drops straight to your contribution margin. Ask for volume discounts, longer payment terms, or alternative materials that maintain quality at lower cost.
2. Reduce Fulfillment Costs
Shipping and fulfillment often account for 10-15% of revenue. Compare 3PL providers quarterly. Consolidate shipments where possible. Offer free shipping above a threshold that protects your margins — do not absorb shipping costs on low-value orders. Use the Ecommerce Profit Calculator to model the impact of different shipping strategies.
3. Raise Prices Strategically
Most DTC brands underprice. According to the Financial Accounting Standards Board (FASB), variable costing separates fixed from variable costs to give a clearer picture of product profitability. Use that clarity. If your CM ratio is below 40%, you are either underpriced or your costs are too high. Test a 5-10% price increase on your best-selling products. Monitor conversion rate for two weeks. In most cases, the revenue increase from higher prices more than compensates for any drop in volume.
4. Kill Low-Margin Products
This is the hardest move and the most impactful. Products with a CM ratio below 20% are almost certainly losing money after you factor in the fixed costs they consume — warehouse space, catalog management, customer service inquiries. Discontinue them or reposition them as premium bundles with higher margins.
How Should You Use Contribution Margin in Audits?
Here is how we use contribution margin in every ecommerce audit:
- Calculate CM ratio for every product — not just top sellers
- Rank products by CM ratio — identify your real profit drivers
- Cross-reference with sales volume — high CM + high volume = your winners
- Flag anything below 30% CM ratio — these need price increases, cost reduction, or discontinuation
- Model your break-even point — know exactly how many units you need before profit starts
The brands that grow sustainably are the ones that understand the difference between revenue and contribution. Revenue is what customers pay you. Contribution margin is what you actually keep.
If you want to understand how small improvements compound across your entire business, read how the geometric growth formula turns three 10% gains into 33% revenue growth.
Frequently Asked Questions
What is a good contribution margin ratio for ecommerce?
For DTC brands, aim for 50-65%. Below 40% is a warning sign — your variable costs are consuming too much revenue. Above 65% is strong and gives you room for aggressive customer acquisition.
How is contribution margin different from gross margin?
Gross margin only subtracts COGS from revenue. Contribution margin subtracts all variable costs — including shipping, payment processing, and sales commissions. Contribution margin gives a more complete picture of what each sale actually earns.
Should I use contribution margin or net profit to evaluate products?
Use contribution margin for product-level decisions (pricing, promotion, discontinuation). Use net profit for business-level decisions (overall profitability, growth planning). Net profit allocates fixed costs across products, which can distort individual product performance.
How often should I recalculate contribution margins?
Quarterly at minimum. Recalculate immediately after any change to supplier pricing, shipping rates, or payment processing fees. Costs shift — your margins shift with them.
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