Inventory glossary

What is Contribution margin?

Contribution margin is the money left from a sale after subtracting the variable costs of that sale, before fixed costs like rent or salaries are paid.

Contribution margin tells you which products actually pay for your fixed costs and which ones barely help. Two products can have the same gross margin percentage but very different contribution margins once you factor in shipping, payment fees, and packaging that scale with each order.

Use it to decide what to restock aggressively and what to let fade out. A SKU with a thin contribution margin needs high volume to be worth the shelf space and reorder effort. If it also sells slowly, it may not be worth carrying at all.

Formula

Contribution margin = Selling price - Variable cost per unit

Example

A candle sells for 20 dollars. The wax, wick, jar, and packaging cost 6 dollars, and the payment processing fee costs 1 dollar. Variable cost per unit is 7 dollars, so the contribution margin is 20 - 7 = 13 dollars per candle. If the store sells 100 candles in a month, total contribution is 1,300 dollars toward rent and other fixed costs.

Common mistakes

  • Confusing contribution margin with gross margin by leaving out variable costs like shipping or transaction fees.
  • Treating a high contribution margin product as automatically a good reorder choice without checking how fast it actually sells.
  • Using contribution margin per unit instead of total contribution when comparing products with very different sales volumes.

Contribution margin and SteadyShelf

SteadyShelf does not calculate margins, but its sales forecasts show how many units of a SKU you can expect to sell, which you can pair with your own contribution margin to see which products are worth reordering first.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Gross margin · Cost of goods sold · GMROI · Sell-through rate · Product velocity

Full inventory glossary

FAQ

Is contribution margin the same as profit?

No. Contribution margin only subtracts variable costs. Fixed costs like rent, salaries, and software still need to be covered from the total contribution before any profit is left.

Should I stop reordering a SKU with low contribution margin?

Not automatically. A low margin item that sells in high volume can still contribute more total dollars than a high margin item that barely sells. Look at total contribution, not just the per unit number.

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