See exactly how much of each sale is profit, how much is eaten by costs — and how many units you need to sell before you break even.
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You sold 500 units last month. Good. But how much did each sale actually contribute to your bottom line? That question haunts every DTC founder who scales volume without understanding their unit economics. Contribution margin answers it.
It is the money left over from each sale after you strip out every variable cost tied to producing and delivering that product -- COGS, shipping, transaction fees from Shopify, packaging, and any per-unit commissions.
Unlike gross margin, which often only accounts for COGS, contribution margin gives you the complete picture of what each sale is actually worth to your business. It is the metric that tells you whether selling more units will move you toward profitability -- or whether each additional sale is barely covering its own costs.
The math itself is simple -- the hard part is making sure you include every variable cost (most brands miss at least one). To calculate contribution margin per unit, subtract all variable costs from your selling price. To express it as a ratio, divide that number by the selling price.
CM per Unit = Selling Price − Total Variable Costs
CM Ratio = (CM per Unit ÷ Selling Price) × 100%
Here is a concrete example. You sell a product for $50 and your variable costs total $22 -- $12 COGS, $4 shipping, $1.45 in transaction fees, $1.50 packaging, and $3.05 in other costs. Your contribution margin is $28 per unit, or 56%. That means 56 cents of every dollar you earn goes toward covering fixed costs and generating profit.
But that is only half the picture. Once you know your contribution margin, you can calculate your break-even point: divide your total monthly fixed costs by the contribution margin per unit. If your fixed costs are $5,600/month, you need 200 units to break even. Unit 201 is where profit starts.
Revenue feels good. Contribution margin tells the truth. It answers the question that actually matters: does selling one more unit make you more profitable, or are you just moving money around? Here is how it shapes your biggest decisions:
Knowing your contribution margin also gives you leverage in supplier negotiations, clarity on which products to bundle or discount, and confidence in your fulfillment spend. It is the foundation of data-driven ecommerce growth strategy -- and every pricing, marketing, and operational decision should start with it.
It is the money left from each sale after you subtract every variable cost -- COGS, shipping, transaction fees, packaging, and any other per-unit costs. Think of it as the portion of each sale that actually "contributes" to covering your fixed overhead and generating profit. If your contribution margin is low or negative, selling more units will not save you -- it will just multiply the problem.
Take your selling price and subtract all variable costs per unit. That gives you the contribution margin in dollars. To get the ratio (percentage), divide that dollar amount by your selling price. For example, a $50 product with $22 in variable costs has a $28 contribution margin and a 56% CM ratio. The ratio is what you want to track because it lets you compare across products at different price points.
For DTC brands, 40-60% is the healthy range. That gives you enough room to cover fixed costs, fund customer acquisition through paid ads, and still generate profit. Premium or luxury brands often hit 60%+ because their perceived value supports higher pricing. Commodity products may operate at 20-40%, but below 20%, running profitable paid campaigns becomes nearly impossible -- there is simply not enough margin left to absorb acquisition costs.
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