If you’re running an eCommerce business on Shopify (or Amazon), understanding your contribution margin isn’t just helpful, it’s critical. Think of it as the financial heartbeat of your product catalog, telling you how much actual profit you’re making after covering variable costs. Mastering this number can mean the difference between scaling with confidence or burning cash at checkout.
In this guide, we’ll walk through the contribution margin formula, how to use it in your business, and how dynamic pricing tools like Trellis can help you apply it in real-time to maximize profitability. We’ll also compare it to other key metrics like LTV:CAC, and explore its specific relevance to eCommerce brands who may be used to focusing more on conversion rates than bottom-line profit.
What is Contribution Margin?
Contribution margin measures how much money is left over from a product sale after subtracting variable costs. It tells you how much of your sales revenue is actually contributing to covering fixed costs and eventually generating profit.
Contribution Margin Formula:
Contribution Margin = (Revenue – Variable Costs) / Revenue
This will give you a ratio (or percentage) that reflects profitability per dollar of sales. You can also express it in dollar terms:
Contribution Margin = Revenue – Variable Costs
Example:
Let’s say you sell a coffee grinder for $100. Your variable costs (COGS, transaction fees, shipping, etc.) add up to $60. Your contribution margin would be:
($100 – $60) / $100 = 40%
That means for every sale, 40% of the revenue contributes to fixed costs and profit.
Why Contribution Margin Matters for eCommerce Brands
Unlike marketplaces like Amazon, where pricing dynamics are highly fluid, DTC stores often operate with fixed pricing strategies. This can make it easy to ignore how costs affect profit per SKU.
But that’s where things go wrong.
You might be obsessing over conversion rates or top-line revenue, but if your contribution margin is too low, even strong sales volumes won’t translate to meaningful profits. Worse, you could be scaling an unprofitable product without knowing it.
That’s why contribution margin should be part of every product launch, pricing strategy, and discount campaign you run.
How Contribution Margin Compares to Other Profit Metrics
Contribution margin focuses on unit-level profitability, unlike gross margin, which considers all costs including fixed ones. Here’s how it stacks up against other common metrics:
- Gross Margin = (Revenue – COGS) / Revenue — doesn’t separate fixed vs. variable
- LTV:CAC = Lifetime value to customer acquisition cost — strategic but long-term
- Net Profit Margin = (Net Profit / Revenue) — includes all expenses, not actionable at SKU level
While LTV:CAC is great for guiding growth decisions, contribution margin helps with day-to-day pricing and inventory decisions.
The Role of Contribution Margin in Dynamic Pricing
Dynamic pricing adjusts your product prices in real time based on demand, competition, and performance data. For Amazon sellers, this is already standard practice, but for DTC brands, it’s a newer frontier.
Using a tool like Trellis, you can:
- Set pricing floors based on minimum contribution margin thresholds
- Run A/B tests to optimize price points for margin vs. volume
- React instantly to cost fluctuations (e.g., shipping spikes or supplier changes)
Real-World Example:
In Trellis’ case study, one brand used dynamic pricing to increase profits without reducing conversions by focusing on contribution margin insights. Instead of flat discounts, they optimized price points to maintain their ideal margin across different customer segments and seasons.
How to Calculate and Apply Contribution Margin in Your eCommerce Store
- Identify all variable costs per product.
- Product cost (COGS)
- Shopify transaction fees
- Payment processing (Stripe, PayPal, etc.)
- Shipping & fulfillment
- Discounts & promo costs
- Use your P&L to track revenue.
- Plug into the contribution margin formula: If you sell a t-shirt for $30 with $18 in variable costs: ($30 – $18) / $30 = 40% contribution margin
- Set margin benchmarks: Decide your minimum acceptable margin (e.g., 30% for low-margin goods, 50% for premium items)
- Adjust pricing or costs to hit targets:
- Raise prices (or tier them)
- Negotiate supplier rates
- Optimize fulfillment
- Implement margin-aware promotions:
- Only offer discounts on high-margin SKUs
- Use upsells to boost average order value while maintaining margin
DTC vs. Amazon: Margin Strategy Differences
On Amazon:
- Dynamic pricing is expected.
- Contribution margin can be squeezed by referral fees, FBA costs, and PPC.
- Buy Box competition demands margin discipline.
With DTC:
- You have more control over pricing and customer experience.
- Contribution margin can be higher, but is more prone to neglect.
- Requires manual oversight unless automated.
If you sell on both platforms, understanding and managing contribution margin in each context is critical. DTC stores give you more flexibility, but Amazon requires stricter optimization due to tighter margins.
Contribution Margin Best Practices for eCommerce Profitability
- Monitor weekly: Margins fluctuate with shipping rates, discounts, and cost changes. Keeping a close eye on these fluctuations is key, but you don’t want to make too many changes in too short of time as you won’t be able to determine what is working (or isn’t).
- Automate analysis: Use tools that integrate with your store to track margin in real-time. Set up alerts and prioritize KPIs that matter most.
- Use margin to drive pricing decisions: Don’t just follow competitors. Every business is different, so price based on what’s profitable for you.
- Segment by product type: High-margin products can subsidize low-margin leaders. A great way to start is to consider your catalog through the guise of the Pareto Principle.
- Align with LTV:CAC: Use high-margin SKUs to acquire customers profitably through what we call The Golden Ratio.
Final Thoughts: Contribution Margin is Your Profit North Star
DTC brands (and Amazon sellers too) can no longer afford to ignore contribution margin. It’s not just an accounting metric; it’s a tool for profit-focused decision-making.
Combined with smart tools like Trellis that use AI to optimize pricing in real time, contribution margin becomes a powerful lever for growth.
Before you run that next flash sale, launch a new product, or scale ad spend, ask yourself: Is your contribution margin healthy enough to grow sustainably?
Book a demo to see Trellis’ Dynamic Pricing and comprehensive dashboards to make the most of your contribution margin.
