What is contribution margin?
Contribution margin is what one order leaves after the costs that come with it: product, shipping, payment fees and anything else paid per order. It is the money left to pay for ads and fixed costs. One divided by it, as a fraction, is your break-even ROAS.
The formula
Only costs that come with each order are counted. Fixed costs such as salaries, software and rent are left out, because they are paid whether or not the order happens. Returns and packaging go in other costs.
Worked example
Each $60 order leaves $33.20 before ads and $8.20 after them.
Using it on Meta ads
Use the before-ads figure as the most one order may cost in ads. If your cost per purchase in Ads Manager is higher, each sale loses money on the first order.
Repeat purchases change the picture: the LTV calculator adds them up, and the CAC calculator shows what winning a new customer costs.
Questions
Gross margin takes off only the product cost. Contribution margin also takes off shipping, payment fees and anything else paid per order, so it is closer to what an order really leaves.
Three cuts of the same margin. CM1 is what an order keeps after product cost. CM2 also takes off shipping, payment fees and other per-order costs. CM3 takes off the ad spend too. This calculator gives CM2 and, once you enter an ad cost per order, CM3.
This calculator shows both. Before ads, contribution is the most one order can cost in ads without losing money. After ads, it is what the order leaves once its ad cost is paid.
Break-even ROAS is 1 divided by contribution margin as a fraction. A 50% contribution margin gives a break-even ROAS of 2.00×.
