Contribution margin calculator

Contribution margin is what an order leaves after the costs that order causes. CM1 takes off product cost, CM2 also takes off shipping, payment fees, packaging and returns, and CM3 also takes off ads. CM2 tells you whether an order is worth having; CM3 whether your ads make money.

CM2 per order: $18.60
CM1, after product cost: $24
CM3, after ads: $6.10
CM2 as a share of order value: 37.2%
Break-even ROAS: 2.69x

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The formula

CM1 = kept share × order value × (1 − product cost)
CM2 = kept share × (order value × (1 − product cost − payment fees) − shipping) − return rate × (shipping + return shipping) − packaging
CM3 = CM2 − ad spend per order
Break-even ROAS = order value ÷ CM2

Rates are shares between 0 and 1: 30% is 0.3. Returned products are assumed to go back into stock.

Worked example

Orders average $50, product cost is 40% and payment fees 2%.

Shipping costs $3 each way, packaging $1, and 20% of orders come back.

Ads cost $12.50 per order placed.

CM1 is $24, CM2 $18.60 (37.2% of order value) and CM3 $6.10. With CM2 at $18.60, ads break even at a ROAS of 2.69x.

Questions

Why count returns in contribution margin?

A returned order brings no revenue but still costs shipping both ways and packaging. Leaving returns out makes CM2 look higher than the money that reaches you, especially in categories with high return rates.

Which contribution margin should I watch?

CM2 to decide which products and orders are worth having, and CM3 to judge whether your ads make money. Fixed costs such as salaries and rent come after CM3.

Where do I find these numbers?

Product cost from supplier invoices or Shopify's cost per item, shipping and returns from your carrier or shipping app, payment fees from your payment provider, and ad spend from Meta and Google for the same period.

Should I enter order value with or without sales tax or VAT?

Use order value after the tax is taken out, because it isn't yours to keep. Counting it makes every ROAS look better than it is. Keep product cost, fees and ad spend on the same basis.

The full guide

Contribution Margin for D2C Brands: CM1, CM2 and CM3 ExplainedContribution margin shows what each order leaves after the costs it causes. How to work out CM1, CM2 and CM3 for a Shopify brand, with returns and ad spend included.