A simple example
An order generates £100 of net revenue and £60 of agreed variable costs. It contributes £40 before any additional costs excluded from that definition. This is an illustrative example.
Define the cost convention
A commercial model might include product cost, payment fees, fulfillment, returns and variable acquisition costs. Teams sometimes report contribution before advertising and sometimes after it. Name the version explicitly so marketing and finance are discussing the same number.
Illustrative order model
Take £100 of net revenue, £35 product cost, £10 fulfillment and £5 payment and other agreed variable costs. Contribution before acquisition is £50. With £30 of acquisition cost, contribution after acquisition is £20. The invented example excludes fixed costs and is not net profit or a client result.
Why market expansion changes the answer
A similar selling price can produce different contribution when delivery, returns or local costs differ. Model the local order mix and operational assumptions before copying the same advertising target into another country. Tax treatment and accounting conventions should be agreed with the business’s finance team.
Decisions this model supports
- Which products can support paid acquisition?
- What happens when discounts increase conversion?
- How much room remains after delivery and returns?
- What acquisition cost can the offer tolerate?
- Does an increase in orders improve total contribution?
Translate a sales target into a commercial decision
Imagine two products generate the same revenue but differ in product cost, fulfilment and returns. Promoting them equally can produce different contributions to the business. A growth review should identify which variable costs belong in the chosen margin measure and apply that definition consistently. Finance and marketing need a shared calculation before debating which campaign is strongest.
Use a simple scenario table to expose the trade-offs. Compare the expected sale value, included variable costs and acquisition spend for each offer. Label assumptions clearly and replace estimates with observed data when it becomes available. The purpose is to understand whether an additional sale supports the business, not to make a dashboard appear more sophisticated. Contribution is also not the same as final company profit: fixed costs and other obligations may sit outside the chosen measure.
- Agree the cost categories and treatment of refunds with the finance owner.
- Review product and market mix alongside average revenue.
- Keep scenarios separate from actual results and explain changes to the formula.
Review revenue efficiency and profit →
Frequently asked questions
What is contribution margin?
Contribution margin is revenue less the variable costs included in a stated definition. It shows what remains to cover fixed costs and profit, making it useful when revenue growth alone hides weaker economics.
Why can two orders with equal revenue have different contribution?
Product cost, discounts, fulfilment, returns and other included variable costs can differ. State the cost convention before comparing orders or channels.
Can a platform ROAS target establish profitability?
No. ROAS compares attributed revenue with advertising cost. It does not include the complete cost structure of the order.
Sources and further reading
Primary material for the concepts discussed here. Our practical checklists and illustrative examples are editorial recommendations. Source links open in a new tab.