What is contribution margin vs gross margin?

Gross margin only subtracts COGS from revenue. Contribution margin includes ALL variable costs: COGS, shipping, packaging, payment processing fees (2.9% + $0.30), returns, and fulfillment. Most brands think they have 60% gross margins but actually have 25-35% contribution margins.

How do I calculate breakeven ROAS?

Breakeven ROAS = 1 / Contribution Margin %. If your true contribution margin is 25%, your breakeven ROAS is 1/0.25 = 4x. This means you need $4 in revenue for every $1 spent on ads just to break even. Most brands underestimate this because they use gross margin instead of contribution margin.

What hidden costs do most brands forget?

The most commonly forgotten costs are: payment processing fees (2.9% + $0.30 per transaction), return shipping and restocking (5-15% of orders), packaging materials ($1-5 per order), 3PL pick and pack fees ($2-5 per order), and platform transaction fees (Shopify charges 0.5-2%). These can add up to 15-25% of revenue.

Why does my 3x ROAS campaign lose money?

If your contribution margin is 25%, you need 4x ROAS to break even. A 3x ROAS campaign with 25% margins loses $0.25 for every dollar spent on ads. The platform inflation problem (covered in our ROAS Audit tool) makes this worse: your reported 3x might actually be 2.1x true ROAS.

How do returns affect my breakeven ROAS?

Returns are silent profit killers. A 10% return rate on a $50 product with 1.7x breakeven ROAS effectively raises your breakeven to ~1.9x. You still pay for the ad, shipping both ways, and often cannot resell at full price. Categories like apparel (20-30% returns) and electronics (15-20%) are hit hardest.

What is a good contribution margin for ecommerce?

Healthy contribution margins vary by category: Beauty/Skincare 35-50%, Apparel 25-40%, Electronics 15-25%, Food/Beverage 20-35%, Supplements 40-60%. If your contribution margin is below 20%, scaling with paid ads is extremely difficult because you need 5x+ ROAS just to break even.

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