Contribution Margin
CRM & RetentionAlso: Unit Contribution Margin · Contribution Per Unit
Quick definition
Contribution margin is what's left from a sale after subtracting the variable costs directly tied to making and delivering that sale, like materials, shipping and payment fees. It shows how much each sale actually contributes toward covering fixed costs and generating profit.
Compare this figure against your CPA or CAC. If contribution margin is smaller than what you spend to acquire the customer, you need repeat purchases or a longer relationship to break even.
How it varies across Australia
Contribution margin varies sharply by product category and business model. Physical ecommerce with shipping and returns typically sits well below software or services businesses with near-zero marginal delivery cost. The number matters less on its own than how it compares to your customer acquisition cost.
Compare unit economics across Australian industries →What it actually means
Contribution margin answers a narrower question than gross margin. It isolates the costs that move directly with a single sale (materials, payment processing, shipping, fulfilment) and strips out everything fixed (rent, salaries, software subscriptions). What's left is the amount each sale actually contributes toward paying for the fixed stuff and, eventually, profit.
This matters most when you put it next to customer acquisition cost (CAC). If your contribution margin per order is smaller than your CAC, you're paying to lose money on every first sale and betting the relationship survives long enough to recover it through lifetime value (LTV) and repeat purchases. That's a fine strategy for subscription businesses with strong retention rate. It's a dangerous one for low-frequency purchases with high churn.
Contribution margin also explains why average order value (AOV) increases don't always help as much as expected. A bigger cart with heavier shipping costs or steeper discounting can grow revenue while shrinking the contribution margin per order. Growth and profitability are not the same conversation, and this metric is where they split.
Contribution margin is the number that decides whether growth makes you richer or just busier.
How to calculate it
Contribution Margin = Revenue per unit minus Variable Cost per unit
Worked example. You sell a product for $100. Materials, packaging, shipping and payment fees total $40. Contribution margin = $100 minus $40 = $60 per unit, or 60%. That $60 is what's available to cover fixed costs and fund acquisition of the next customer.
The Australian context
Australian ecommerce businesses often underestimate variable costs because shipping across a large, low-density country is expensive relative to markets like the United Kingdom. Freight, returns handling and regional delivery surcharges eat into contribution margin faster than founders expect when they first model pricing.
GST also needs careful handling. Contribution margin should be calculated on GST-exclusive revenue and costs, otherwise the tax component inflates the apparent margin and misleads pricing decisions.
Where people get this wrong
Related terms
Common questions
What's the difference between contribution margin and gross margin?
Contribution margin only includes costs that vary directly with each sale, like shipping and payment fees. Gross margin often includes allocated fixed costs like warehouse overhead. Contribution margin is the sharper tool for pricing and acquisition spend decisions.
What's a good contribution margin?
It depends entirely on your business model and fixed cost base. Software businesses often see very high contribution margins because delivery costs are close to zero. Physical goods businesses with shipping and returns typically run lower. Compare your figure to your acquisition costs rather than an industry average.
Why does contribution margin matter for acquisition spend?
If your contribution margin per order is smaller than your CAC, every new customer starts as a loss. That's only sustainable if lifetime value and repeat purchases recover the gap over time. Without checking contribution margin, acquisition budgets get set blind.
Does contribution margin include marketing spend?
No. Marketing and acquisition spend are treated as separate costs you're deciding whether to fund with the contribution margin, not as part of the calculation itself. Contribution margin tells you how much budget is available to spend on acquisition and still stay profitable.
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About New Rebellion
New Rebellion is a marketing intelligence consultancy. We build tools, score Australian businesses on how their marketing actually performs, and publish Debrief every day. This dictionary is part of how we work in the open.
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