Why is it important?
Contribution Margin refers to the money you’re left with after all costs incurred to fulfil and order, including marketing costs, are paid. This specific definition is also known as CM3.

How is it calculated?
Contribution Margin is calculated by dividing the revenue generated by the advertising campaign by the cost of the advertising.

The formula is Revenue – Product Costs – Packaging Fees – Fulfilment Costs – Tax – Shipping Cost Incurred – Transaction Fees – Ad Spend = Contribution Margin

For example, if a product sells for $10 and costs you $7 between your Product Costs, Shipping Costs, Fulfilment/Packaging Costs, Tax, Ad Spend and Transaction Fees, your contribution margin would be $3. You need to ensure your Contribution Margin is greater than your fixed operational expenses to stay profitable.