What is contribution profit?

Contribution profit is a business’s sales revenue less its variable costs. The resulting contribution dollars can be used to cover fixed costs (such as rent), and once those are covered, any excess is considered earnings. Contribution margin (presented as a % or in absolute dollars) can be presented as the total amount, amount for each product line, amount per unit, or as a ratio or percentage of net sales.

Your inventory management system might do a fantastic job of accurately calculating COGS for you, but there are other expenses in your business outside of those purchase and manfuacturing costs tracked in the inventory system. For example:

• Shipping costs -- how much is costing you to actually ship sales order to the customer?
• Platform selling costs -- for every e-commerce order, how much is the e-commerce platform charging you?
• Marketing costs -- how much are you spending to acquire new customers and sell more to existing customers?
• Warehouse costs -- how much is it costing you to store inventory and fulfill sales orders?

Contribution profit helps you to accurately assess the profit of your business at a granular level. You can identify the true profit you're seeing from different brands, product categories, and products.

How do you calculate contribution profit?

Contribution Profit = Gross Profit - Variable Expenses

Units sold is the number of units that were sold during the period being analyzed.

Beginning inventory is the number of units held in inventory at the start of the same period.

As an example, Company A made a gross profit of $250,000 last month. Company A spent:

• $40,000 on shipping products to customers
• $20,000 on fees to Amazon and Shopify for selling on their platforms
• $30,000 on warehouse operations
• $80,000 on marketing on Google and Meta

Using our above formula:

Contribution Profit = $250,000 - ($40,000 + $20,000 + $30,000 + $80,000)

Company A’s contribution profit is $110,000, giving an overall contribution margin of 44%.

What is a good contribution margin?

Generally, a good contribution margin varies by industry, but in many sectors, a contribution margin of 30% or higher is considered strong. This means that for every dollar of sales, at least 30 cents contributes to covering fixed costs and profit. Ultimately, a good contribution margin allows a business to sustain its operations, invest in growth, and withstand fluctuations in sales.

How do I track contribution margin in Easy Insight?

Easy Insight pulls over the COGS from your inventory management system, shipping costs from your shipping platform, channel fees from your e-commerce platforms, and accounting costs from your accounting system to help you calculate contribution profit. In the prebuilt dashboard of your inventory connection, the Margin section includes a variety of views to help you see where exactly your costs are coming from as you work to your end contribution profit:

This view helps you to see discounts, credits, COGS, shipping costs, channel costs, and variable costs all in a single view. You can look at this data across your entire business, break it down by product category or brand, or go all the way to the individual SKU level:

Want to learn about other inventory metrics? See Inventory Metrics for other ways to help measure and improve your business.