Gross margin, contribution margin, and net margin: the difference, with an example from a marketplace store

The three margins measure the same money at different points along the way. Gross margin subtracts only the product cost. Contribution margin also subtracts everything that varies with each sale: commission, shipping, tax, packaging, listing, and returns. Net margin also subtracts fixed expenses. For a store with R$ 100 mil in monthly revenue on Mercado Livre, a 54% gross margin becomes an 18,4% contribution margin and a 9,4% net margin. All three are correct, but only the last one pays your bills.

I see a lot of sellers celebrate the first and get alarmed by the last. The math isn’t the problem. It’s looking at the wrong margin when making a decision. I’ll work through all three using the same store so you can see what each one is for.

#The example store

A home goods store that sells only on Mercado Livre, in October:

Here’s how the three margins work out with these numbers.

#Gross margin: are you buying the product at a good price?

Gross margin = (revenue − taxes on sales − COGS) ÷ revenue

R$ 100.000 − R$ 6.000 − R$ 40.000 = R$ 54.000. Gross margin: 54%.

Some people calculate gross margin without subtracting tax first (which would give 60%). Both methods are used; the important thing is to use the same one when comparing months. I prefer subtracting tax because it’s unavoidable and proportional to sales.

Gross margin answers one question: are you buying well? It improves when you negotiate with your supplier, switch suppliers, or raise your price. It’s great for comparing similar products and evaluating a new purchase.

But it ignores exactly what the marketplace charges. A marketplace store with a 54% gross margin could still be losing money.

#Contribution margin: does the sale pay for itself?

Contribution margin = gross margin − variable selling costs

Variable costs only exist because a sale happened: commission, shipping, packaging, listing, and returns. In this example, they add up to R$ 35.600.

R$ 54.000 − R$ 35.600 = R$ 18.400. Contribution margin: 18,4%.

I consider this the most important margin for marketplace sellers, for three reasons:

1. It determines pricing. If a product has a negative contribution margin, every sale takes money out of your cash flow, and selling more makes it worse.
2. It determines promotions and campaigns. A 10% discount comes straight out of your contribution margin, not your gross margin.
3. It determines your listing strategy. A product’s maximum ACOS is its contribution margin before Ads. I explained the logic in Good ACOS, bad profit.

You can calculate it for the entire store, as we do here, or for each order. Per order is where it becomes truly useful: the same month with an average of 18.4% can include products at 35% and others at −5%. I showed how to calculate it for a sale in Profit margin: how to calculate it.

#Net margin: Is the business profitable?

Net margin = (contribution margin − fixed expenses) ÷ revenue

R$ 18.400 − R$ 9.000 = R$ 9.400. Net margin: 9.4%.

That’s the bottom line: for every R$ 100 in sales, the business keeps R$ 9,40. It doesn’t help you set a product’s price, but it does show whether the business is healthy and whether you can hire someone or grow your stock.

Under Simples Nacional, tax on profit is already included in the single tax rate, so the example’s net margin is practically the month’s profit. Under other tax regimes, income tax and contributions on profit are still due.

#All three, side by side

In practice. A couple who sells toys showed me their September results: a 51% gross margin, which they thought was great. When we broke down contribution margin by product, 18 of their 60 active listings had negative contribution after Ads. Almost all were items under R$ 40 with high shipping costs relative to their price. Pausing Ads spend on those 18 raised the following month’s net margin from 4% to 9%, with revenue down 6%.

#Which margin should you track day to day?

All three, at their own pace:

• Contribution margin by order and product, every week. It shows which listing needs a new price, which product can’t support Ads, and which promotion has turned into a loss.
• Gross margin with every purchase. Before placing an order with a supplier, check whether the product belongs in your catalog.
• Net margin every month. Review it at month-end in a simple income statement. I created a template in Income statement for a marketplace store.

Almost no one tracks contribution margin because it takes the most work: commission, shipping, and Ads data come from different marketplace reports. Milewa brings it all together by order. It pulls the commission and shipping charged by Mercado Livre and Shopee, applies your costs and taxes, allocates Ads spend for each listing, and shows the contribution margin for every order and product. Add your fixed expenses, and your monthly income statement shows your net margin—no spreadsheet needed.