Performance marketers need to think beyond ROAS.
For too long, paid media has been measured in isolation, with success judged purely by ROAS or CPA. But in reality, performance marketing doesn’t exist in a vacuum—it’s a direct contributor to a business’s bottom line.
Retail brands don’t just need more sales; they need profitable growth. That’s where contribution margin comes in. It’s not enough to focus on revenue or ad performance alone—marketers need to embrace business metrics like unit economics, variable costs, and operational efficiency to truly scale profitably.
Understanding contribution margin ensures your ad spend is working smarter, not just harder. A campaign that looks strong on ROAS might actually be eroding profits when factoring in product costs, fulfillment fees, and transaction charges. Conversely, an ad set with a lower return might be driving real, sustainable margin.
Let’s dive deeper into why contribution margin is a non-negotiable metric for e-commerce success and how it should shape your marketing strategy.
What Is Contribution Margin?
Contribution margin is the revenue generated from selling a product, minus the variable costs directly associated with making that sale.
The simple metric shows you how much money you’re actually making before fixed operating expenses (like rent, salaries, and utilities) come into play.
Understanding your contribution margin isn’t just about keeping tabs on your profits; it’s about making informed decisions that can help optimise pricing, marketing strategies, and inventory management.
How To Calculate Contribution Margin?
Let’s break it down with an example to make this clearer:
Imagine you’re generating a revenue (excluding VAT) of €85 and encounter the following variable costs:
- Product Cost: €22
- Transaction Fee: €2
- Shipping Cost: €5
- Fulfillment Cost: €3
- Packaging Cost: €0.80
- Advertising Cost (CPA): €20
- Total Variable Costs = €52.80
Now, to calculate the contribution margin, we subtract the total variable costs from the revenue:Contribution Margin = €85 – €52.80 = €32.20So, in this case, your contribution margin would be €32.20. After covering all the variable costs tied to this particular sale, you have €32.20 to contribute toward covering your fixed costs (like rent, salaries, and software) before you start seeing actual profit.What Is Contribution Margin’s Role In Overall Growth?Contribution margin can help refine your operations, eliminate waste, and boost profitability. Let’s break this down with an example to show how it can help you scale your business.Imagine a brand that generates €120,000 in sales each month. The breakdown of their variable costs looks like this:
- Product Cost: €45,000
- Shipping Costs: €12,000
- Transaction Fees: €4,500
- Fulfillment Costs: €5,500
- Advertising: €30,000
Total Variable Costs = €97,000
By subtracting the total variable costs from the sales, we calculate the contribution margin:
Contribution Margin = €120,000 – €97,000 = €23,000
So, this brand has a contribution margin of €23,000 each month. This is the amount left after covering all the variable costs, and it contributes to covering fixed expenses and generating profit.Now, let’s imagine this brand’s sales double to €240,000 per month. If they maintain the same expense ratios for each category, the updated costs would be:
- Product Cost: €90,000
- Shipping Costs: €24,000
- Transaction Fees: €9,000
- Fulfillment Costs: €11,000
- Advertising: €60,000
Total Variable Costs = €174,000
The new contribution margin would be:
Contribution Margin = €240,000 – €174,000 = €66,000
In this scenario, the contribution margin has jumped to €66,000. This illustrates the scale effect: as sales grow, your contribution margin grows faster, especially if you’re able to maintain or optimise your cost structure.
Even though operational expenses (like rent and salaries) remain fixed at €15,000 a month, we see a significant increase in net profit. Before scaling, with a contribution margin of €23,000, after covering the fixed costs, the net profit would be:
Net Profit = €23,000 – €15,000 = €8,000
After scaling, with a contribution margin of €66,000, the net profit would be:
Net Profit = €66,000 – €15,000 = €51,000
That’s an increase of €43,000 in net profit—demonstrating the power of scaling effectively and your contribution margin’s key role in driving business growth.
How To Scale & Get Better Bargaining Power
As your business scales, it’s not just about improving operational efficiency—it’s also about gaining significant bargaining power.
One of the most impactful areas is supplier relationships. With higher sales volumes, you can negotiate better product pricing or even secure volume discounts. Suppliers are often willing to offer reduced rates to businesses that place larger or more consistent orders. Transaction fees and shipping costs can also be reduced.
These cost-saving opportunities can significantly improve your contribution margin, leading to a healthier bottom line. But they require active negotiation and strategic relationship-building.
How To Manage Operational Expenses?
As your business grows, operational expenses tend to rise, but not always at the same pace as revenue. For example, if your revenue doubles, fixed costs like rent, utilities, and insurance typically remain unchanged.
Similarly, if you keep the same staff level year-round, even during slower periods, you may not be using your labor as efficiently as possible. During peak sales periods, staff costs will increase, but during slower times, they won’t scale in the same way.
This creates an opportunity for greater operational efficiency.
How to Balance Your Spends for Maximum Returns?
As your business grows, it’s common for your marketing efficiency to naturally decline. This doesn’t mean you’re doing something wrong; in fact, it’s a normal part of scaling. To track and manage this, metrics like the Marketing Efficiency Ratio (MER) can help. The MER is calculated by dividing Net Sales by the total amount spent on marketing.
Let’s look at an example:
Imagine your brand generates €120,000 in sales with a marketing spend of €30,000.
In this case, the MER is 4 (€120,000 ÷ €30,000 = 4). This ratio shows how much revenue you're generating for every euro spent on marketing.
However, as you scale and increase your advertising budget, efficiency tends to drop. For example, if you double your marketing spend to €60,000, your efficiency might decrease by 12.5%.
In this scenario, the MER would drop to 3.5 (€210,000 in sales ÷ €60,000 spend).
Even though your marketing spend has increased and the efficiency has slightly decreased, the overall contribution to your bottom line is still much higher. With a sales increase to €210,000, your total margin improves, contributing significantly more to profitability—despite the slightly lower marketing efficiency.
Contribution margin ican help you fine-tune your operations, increase profitability, and make smarter decisions as your business grows.
It helps you understand how much revenue is available to cover your fixed costs, reduce production costs, optimise pricing strategies, or adjust your sales processes.
Need a fresh perspective? Let’s talk.
At 360 OM, we specialise in helping businesses take their marketing efforts to the next level. Our team stays on top of industry trends, uses data-informed decisions to maximise your ROI, and provides full transparency through comprehensive reports.
