Contribution margin calculator

Selling price is what the customer actually pays for one unit, after the discount that is really being offered rather than the one on the price list.

Variable cost per unit is everything that arrives with the sale: the product or its manufacture, inbound freight, outbound shipping you carry, packaging, payment processing, per-order picking and packing, commission, and the expected cost of returns. If a cost would disappear when the unit does not sell, it belongs here.

Fixed costs for the period is optional. It is everything the business pays whether it sells one unit or a thousand: rent, salaries, software, insurance, retainers. Supply it and the page returns the number of units that have to be sold before any of them is covered.

The percentage travels and the amount decides.

The percentage is what you compare between products. A line at 62 per cent contribution and one at 28 per cent are different businesses sharing a warehouse, and a promotion that shifts volume from the first to the second lowers profit while raising revenue.

The amount is what you plan with. Fixed costs are paid in currency, not in percentages, and the number of units required to cover them comes from the amount alone. Two products at the same percentage and different prices cover fixed costs at very different rates, which is why a business that ranks its range only by margin percentage often finds itself selling a great deal of something that never pays the rent.

Contribution is the ceiling on customer acquisition. A unit that contributes 55 can support at most 55 of acquisition cost before the sale stops being worth making, and everything below that has to fund the fixed costs as well.

This is why a media conversation that starts with a benchmark cost per acquisition is starting in the wrong place. The ceiling is not an industry figure; it is the number in the first output box, and it is different for every product in the range. A campaign that is comfortably profitable on one line can be losing money on another at the identical cost per acquisition.

The relationship also runs backwards, and this is the part most accounts never use. Raising contribution raises the acquisition ceiling one for one. Five units of contribution added through better supplier terms is five more units a customer may cost — and unlike a bidding improvement, it applies to every campaign at once and cannot be competed away.

Most disputes about this number are disputes about which costs go where, and there are three cases worth settling in advance.

Labour. A salaried person is a fixed cost. Piece-rate packing, contractors paid per order and overtime driven by volume are variable. A business that treats all labour as fixed overstates contribution and discovers the gap only when volume arrives.

Shipping. If the customer pays the full cost, it is neither: it passes through. If the business subsidises it, the subsidy is variable. A free-shipping threshold makes the subsidy variable and lumpy, and the honest treatment is the expected cost across the order mix.

Advertising. It varies with volume, so it is arguably variable. But putting it inside contribution and then using contribution to decide what the business may spend on advertising is circular. Leave it out when the question is what acquisition may cost, and put it in when the question is whether a channel is worth running at all. What matters is saying which version is on the table.

Fixed costs divided by contribution is the number of units the business has to sell before it earns anything. It is a blunt instrument — one product, one price, one period — and it is the most legible number on this page for anybody outside the marketing function.

It makes the cost of a discount obvious. Cutting the price by five, on a contribution of 55, does not cost five per cent of anything: it removes nine per cent of the contribution and adds forty units to the count the business has to sell to stand still. Volume has to rise by nearly a tenth just to hold position, which is a far higher bar than most promotions clear.

It also makes the cost of a fixed cost obvious in the other direction. A new tool at 550 a month is ten more units a month, every month, for as long as it is subscribed to. Stated that way, the decision usually takes less time.

Compute it per product, not for the business, and recompute it whenever a supplier price, a freight rate or a payment fee moves. Set the acquisition ceiling from the amount rather than from anybody's benchmark. Rank the range by both the percentage and the amount, and notice where the two disagree, because that is where merchandising and media are pulling in opposite directions. And before approving a discount, put it through the units-to-cover line: the version of the argument stated in units is the one that does not need a spreadsheet to check.