Attribution & Measurement
Contribution margin vs gross margin for ecommerce advertising
Gross margin usually subtracts cost of goods from revenue. Contribution margin goes further by subtracting variable costs that rise when you make the sale. For advertising decisions, contribution is often the more useful number.
Example
- Selling price: $100
- COGS: $45
Gross margin = $55 / 55%.
Now subtract:
- Payment fee: $3
- Fulfilment: $5
- Average shipping subsidy: $7
- Expected returns allowance: $5
Contribution before ads = $35 / 35%.
A gross-margin break-even ROAS would suggest 1.82x. Contribution says closer to 2.86x before advertising reaches zero contribution.
Decide which variable costs matter
Not every business includes the same lines. The key is consistency and understanding which costs increase with the order.
Use contribution for allowable CPA
If only $35 remains before ads, paying $50 for the order is not first-order profitable regardless of the 55% gross margin headline. The same principle drives how to calculate your maximum profitable CPA.
Calculate a more realistic threshold
If your ROAS targets are based only on gross margin and ignore fulfilment or shipping, contact us. We can calculate a more realistic contribution threshold.