Contribution margin vs gross margin: which should you track?
Gross margin vs contribution margin for ecommerce, with a worked Amazon example of how fees and RTO shrink a healthy margin, plus margin vs markup.
Published 26 Oct 2026
Key takeaways
- Gross margin subtracts only product cost; contribution margin subtracts every cost that comes with an order.
- The same Amazon shirt shows a 61% gross margin but a 29% contribution margin per order — and less across a month, once RTO, returns and ads come in.
- Use gross margin to screen products; use contribution margin to decide what to sell, where, and how much to spend on ads.
- Margin ≠ markup: a 100% markup is only a 50% margin.
Gross margin is the number most sellers quote. Contribution margin is the one that tells you whether an order — or a product, or a channel — actually makes money. They can be miles apart, and the gap is where most ecommerce businesses quietly lose money.
The two definitions
- Gross margin = (selling price − product cost) ÷ selling price. It only subtracts what the product costs you.
- Contribution margin = (selling price − every cost that comes with the order) ÷ selling price. That means product cost plus shipping, packaging, marketplace commission and fees, payment charges — and, across a month, the cost of cancellations, RTO, returns and ads.
In both cases, use the selling price excluding GST: the GST in your price belongs to the government, not to you.
One order: the same shirt, two very different margins
A 61% gross margin looks like a great product. But after the referral fee, closing fee and shipping, each order actually contributes 29% — and that's an order that gets delivered and kept.
Same gross margin, different contribution margin on every channel
Gross margin can't tell channels apart — the shirt costs the same to make wherever you sell it. Contribution margin can:
| One ₹1,299 shirt on | Gross margin | Contribution margin | Profit per order |
|---|---|---|---|
| Your own website | 61.2% | 52.2% | ₹646.16 |
| Amazon | 61.2% | 28.6% | ₹354.34 |
| Flipkart | 61.2% | 50.6% | ₹626.16 |
That's why channel decisions — and channel-specific pricing — have to be made on contribution margin. Your own website still has to pay to bring customers in, though, which is the next layer.
A whole month: where the rest goes
Across 300 orders a month, some cancel, some come back undelivered (RTO), some are returned, and you spend on ads to get them. Contribution margin counts all of that; gross margin counts none of it.
| Measure | This month | Margin |
|---|---|---|
| Gross profit (revenue − product cost) | ₹1,67,545 | 61.2% |
| Contribution profit (after all variable costs and ads) | ₹40,347 | 14.7% |
| Operating profit (after ₹15,000 fixed overhead) | ₹25,347 | 9.3% |
Net revenue ₹2,73,762 on 221 orders that were delivered and kept, after GST.
Which one should you track?
- Gross margin for sourcing and pricing at a glance — is this product even worth considering?
- Contribution margin for every decision about selling: which products to push, which channel to sell on, how much you can spend on ads, whether COD is worth it. If it's negative, selling more makes things worse.
- Operating (net) profit for the business as a whole, once rent, salaries and software are paid.
What is a good profit margin for ecommerce?
There's no single good number, because a margin is only good if it covers what comes after it. Work backwards instead:
- Gross margin has to leave room for shipping, packaging, fees, RTO, returns and ads. If those eat 40 paise of each rupee of revenue, a 40% gross margin leaves you nothing.
- Contribution margin has to cover your fixed costs and leave a profit. If fixed overhead is 10% of revenue, a 10% contribution margin is break-even for the whole business.
- Before ads, contribution margin sets the ROAS you need: 1 ÷ margin. A 25% margin needs a 4× ROAS just to break even — see break-even ROAS.
Margin is not markup
Markup divides profit by cost; margin divides it by price. Mixing them up is one of the most common pricing mistakes:
| Markup on cost | Gross margin |
|---|---|
| 25% | 20.0% |
| 50% | 33.3% |
| 100% | 50.0% |
| 200% | 66.7% |
What to do with this
- Work out both margins for your bestseller with the Ecommerce Margin Calculator.
- See your contribution margin across a full month — RTO, returns and ads included — with the D2C Profit Calculator.
- For the step-by-step method, read how to calculate contribution margin for ecommerce.