The margin after everything

Gross margin is the number that makes shops look viable and contribution margin is the number that decides whether they are. The gap between them is made of costs that arrive one at a time, each small enough to ignore.

Build it from the order up

Take one order and subtract everything that exists only because that order exists. What is left pays for the rest of the business.

1. 01Revenue excluding VAT. VAT was never yours; counting it as revenue is the most common error in the first year and it inflates everything downstream.
2. 02Cost of the goods, including inbound shipping and any duty, divided across the units that actually arrived saleable.
3. 03Outbound shipping, at what you pay rather than what you charge.
4. 04Packaging, including the box, the filler, the label and the insert nobody reads.
5. 05Payment processing, as a percentage plus a fixed amount per transaction.
6. 06Returns, as an average across all orders rather than as a cost on the ones that come back.
7. 07Picking and packing time, at an hourly rate, even when the hour is yours.

That gives contribution per order. Multiply by orders per month and compare with your fixed costs: platform, domain, accounting, software, any salary. The difference is the business.

The fixed fee changes what you should sell

Payment processing with a fixed component per transaction punishes small baskets in a way percentages do not, and it shows up most on the cheapest things you sell.

Illustrative at 1.5% plus 0.25. On a 10 order the fee is 0.40, which is 4% of revenue. On a 100 order it is 1.75, which is 1.75%. The same price list, the same processor, and more than double the effective rate at the low end. On a 5 item sold at a 40% gross margin, that fee alone takes a fifth of the margin before anything is packed.

Two consequences follow. Cheap single items are often sold at a loss once handling is counted, and a minimum order value or a bundle is not a growth tactic but a correction. This is the arithmetic behind why shops stop selling their cheapest line.

The two numbers to watch after that

• Contribution per order against the cost of acquiring a customer. If acquisition exceeds contribution, every advertised sale loses money, and spending more makes the hole deeper rather than filling it.
• Repeat rate. It is the only thing that makes a high acquisition cost survivable, because the second order carries no acquisition cost at all. Measure it before assuming it.

If both are poor, no amount of optimisation at the margins rescues the shop. The honest options are raising the price, raising the average basket, or selling something else.

Basket size is the cheapest lever you have

Raising the average order is almost always easier than raising traffic or conversion, because the customer is already buying and most of the cost of the order is already sunk.

Illustrative, with the earlier numbers. An order of 40 with 16 of contribution, where the shipping, the packing time and the fixed part of the processing fee are the same whether the basket is 40 or 60. Adding a second 20 item at the same margin adds about 8 of contribution and perhaps 0.30 of extra processing, so nearly all of it drops through. A 50% rise in order value produces roughly a 50% rise in contribution, while a 50% rise in traffic costs you a 50% rise in advertising.

• Bundles of things that genuinely go together, priced slightly below buying them separately.
• A free shipping threshold set from your own contribution rather than copied, which is the most common way basket size is raised.
• A relevant suggestion at the basket, not at the product page, where it competes with the decision in progress.
• Quantity options where repeat purchase is natural. Two of something consumable is an easy yes and ships in the same box.

The thing to avoid is discounting to raise the basket, which raises revenue and lowers contribution, and then shows up as a busy month that made less money than a quiet one.