Ex-factory price tells you almost nothing. The number that actually decides whether a product is worth making is its contribution margin — here's how it works.
Ask most people whether a product makes money and they'll compare two numbers: what it costs to make and what it sells for. The gap looks like profit. It usually isn't. The figure that actually decides whether a product is worth building is its contribution margin, and it's a harder, more honest number than the one most people carry in their heads. Here's contribution margin explained in plain English — what it is, how to work it out, and the threshold we won't go below.
This isn't accounting for its own sake. It's the test every idea has to survive before it earns any of our time. The whole basis of how we find and fix already-selling products is that a great problem is only worth solving if the fixed version can still clear a healthy margin at a price the market will actually pay. Contribution margin is where we find that out.
What contribution margin actually is
Contribution margin is what's left from a sale after you subtract every cost that only exists because you made and sold that unit. Not your rent, not your website, not your time — those are fixed costs that roll on whether you sell one unit or a thousand. Contribution margin strips those out and asks a narrower question: for each unit that goes out the door, how much money is left to "contribute" toward covering all those fixed costs and, eventually, profit? It's the money a single sale genuinely throws off. If that number is thin, no amount of volume saves you — you just lose money faster.
Contribution margin explained: the simple formula
The formula is short: contribution margin = (sale price − variable costs) ÷ sale price, worked out on ex-GST numbers. The trap is in the phrase "variable costs", because most people count two or three of them and stop. The real list is longer. Say you sell a product to a retailer for $100. The factory price might be $35 — but then add international freight and duty, inspection and quality control, retail packaging, the cost of delivering it to the customer, a realistic allowance for warranty and returns, and any payment or marketplace fees. By the time you've been honest, your $65 "profit" might be closer to $28. That's a 28% contribution margin, and it's a very different business to the one the factory price implied.
This is exactly why we insist on a full landed cost before anyone talks margin. Ex-factory price is the smallest, friendliest number in the whole calculation. Everything after it eats into the margin, and freight in particular can do quiet damage — a bulky, light product can look cheap to make and still bleed money once you see what it costs to ship, which is its own trap we've written about in why freight quietly kills product margins.
The threshold that matters
So what's a good contribution margin? For a product we're going to take to market, we look for at least 40% at the price we sell to the retailer or distributor — calculated on ex-GST figures, after every variable cost above. That's not an arbitrary number. Below roughly 40%, there's no room left to absorb a bad freight quote, a batch of returns, a discount the retailer demands, or the marketing it takes to move the thing. A product sitting at 25% can be perfectly real and still not worth building, because the first thing that goes wrong wipes out the profit. Forty per cent and up is the buffer that lets a product survive contact with the real world.
There's a second reason the threshold matters, and it's about the fix. When we find an already-selling product with a repeated complaint, the tempting move is to solve it with a pricier material or new tooling. But if the fix drags the contribution margin below 40%, it isn't a fix — it's a worse business. The best improvements pay for themselves: a smarter supplier, a spec change, better quality control, different packaging. Cheap to do, margin intact.
Why we check it early, not late
The mistake we see most often is treating margin as the last step — something you calculate after you've fallen in love with the idea, sourced a sample and started imagining the brand. By then you're invested, and a thin margin feels like a problem to negotiate around rather than a stop sign. We do it the other way: contribution margin is one of the first gates, not the last. If a product can't clear 40% on honest numbers, we'd rather know in the first hour than after the first order. It's the cheapest possible place to say no.
None of this is complicated maths. It's just the discipline of counting every cost, not the convenient ones, and being honest about the number that's left. Get that right and most bad products quietly disqualify themselves before they cost you anything.
Frequently asked questions
What is contribution margin in a product business?
It's what's left from each sale after you subtract every cost that only exists because you made and sold that unit — factory cost, freight, duty, packaging, returns and fees — but before fixed costs like rent or salaries. It's the money each unit contributes toward covering your fixed costs and profit.
How do you calculate contribution margin?
Contribution margin = (sale price − total variable costs) ÷ sale price, worked out on ex-GST figures. The key is counting every variable cost, not just the factory price: freight, duty, inspection, packaging, warranty and payment fees all belong in the sum.
What is a good contribution margin for a product?
It depends on the category, but for a product we'd take to market we look for at least 40% after every variable cost. Below that there's little room to absorb returns, discounts or a bad freight quote before the profit disappears.