Glossary
Contribution margin
Definition
Contribution margin vs gross and net margin
The three margins answer different questions. Gross margin asks whether the product has room to make money, subtracting only the product cost. Contribution margin asks whether each additional order helps, subtracting every cost that scales with the order. Net margin asks whether the whole business makes money, subtracting fixed costs too.
For day-to-day decisions - can I afford this ad, should I offer free shipping, is this discount survivable - contribution margin is the right lens, because those decisions change variable costs, not your rent.
Why it decides your ad spend
An ad is paid for out of the order's contribution margin. If an order contributes $20 and the click cost $25, the sale lost money no matter how good the ROAS looked on revenue. Your break-even ad spend per order is exactly your contribution margin before ads.
This is also why scaling can quietly hurt: sales volume grows, revenue grows, and every extra order slides the total further into loss when the contribution margin has gone negative under rising ad costs.
Example
A $60 order with $22 product cost, $2 payment fee, $7 shipping and $14 ad spend contributes $15. That $15 covers fixed costs first; whatever remains across all orders is net profit.