Contribution Margin vs Gross Margin

Gross margin is revenue minus product cost. Contribution margin subtracts the other costs caused by an order, such as fulfillment, payment or marketplace fees, discounts, refunds, and expected return loss. Break-even ROAS should use contribution margin because that is the money available to pay for advertising.

Contribution margin % = (net revenue - all variable order costs) / net revenue

Break-even ROAS = 1 / contribution margin %

Decision boundary: This model stops before fixed overhead. Reserve overhead and profit explicitly in a target ROAS rather than hiding them inside product cost.

Order component	Gross margin	Contribution margin
Net product revenue	Starting point	Starting point
Product cost / COGS	Included	Included
Pick, pack, shipping subsidy	Usually excluded	Included
Payment and marketplace fees	Usually excluded	Included
Discounts and mature refund loss	Depends on report	Included explicitly
Reverse logistics and unrecovered stock	Excluded	Included when material

Margin is not markup

A $60 product sold for $100 has a $40 gross profit, a 40% gross margin, and a 66.7% markup on cost. ROAS formulas use margin as a share of revenue. Entering 66.7% markup as margin would create an acquisition budget that does not exist.

A $120 order with $48 product cost has $72 gross profit and 60% gross margin. On that partial view, break-even ROAS is 1.67x.

Step	Amount	Remaining
Net order revenue	$120.00	$120.00
Product cost	-$48.00	$72.00
Fulfillment	-$9.00	$63.00
Payment fees, 3%	-$3.60	$59.40
Returns and discounts, 8%	-$9.60	$49.80

The complete contribution margin is $49.80 / $120 = 41.5%, so break-even ROAS is $120 / $49.80 = 2.41x. Using 1.67x as the campaign floor would spend $22.20 per order more than the model makes available.

Recalculate this full-cost order

• Use Shopify net sales or another clearly labeled net product revenue field, excluding tax.
• Pull landed product cost from inventory or finance records, not a storefront price.
• Use invoices or ledger data for fulfillment, shipping subsidy, processor, and marketplace fees.
• Estimate return loss from cohorts old enough to pass the return window.
• Segment products or regions when their cost structures are materially different.

• Shopify profit reportsProfit and product cost reporting. Checked August 20, 2026.
• Shopify sales reportsGross sales, discounts, returns, and net sales definitions. Checked August 20, 2026.