Calculating contribution margin before announcing a price

Use the completed order’s customer payment and actual order-specific costs to calculate contribution before announcing a price. Contribution margin is contribution divided by retained order revenue; it is not net profit.

Set the order and tax basis

Define one product, direct-store channel and completed order. Record the item price after discounts and any delivery charge collected as retained order revenue, and use the same GST basis for revenue and costs.

For taxable sales, GST is generally 10%. If a GST-inclusive amount is $100, divide by 1.1 to get $90.91 excluding GST; the GST component is $100 divided by 11, or $9.09. To add GST to an ex-GST price, multiply by 1.1.

Taxable sales by businesses registered, or required to be registered, are generally subject to GST unless they are GST-free or input-taxed. Businesses generally must register when annual turnover reaches $75,000 ($150,000 for non-profit organisations); taxi travel is also covered. Check ATO guidance for your registration and sale treatment, and ask an accountant if cost treatment is uncertain.

Keep the delivery charge collected separate from the full delivery cost. Shipping can be free, flat-rate, tiered or charged at exact cost; a tiered offer might charge $10 on orders of $99 or less and ship orders above $99 free. Use those terms only if they match the offer being calculated.

Calculate contribution

Contribution is retained order revenue minus saleable product cost and order-specific variable costs. Contribution margin is that contribution divided by retained order revenue; it is not the product-cost spread or net profit.

Use the cost of a saleable unit, including costs needed to get it ready to sell, rather than the factory quote alone. Add actual packaging, payment fees, pick and pack, full delivery cost, routine support and other costs caused by the order, without counting any cost twice.

If paid acquisition is needed, show contribution both before and after its attributed cost, using the cost for that order where available. Keep fixed development, software, scheduled staff and creator payments outside the per-order calculation; total contribution still needs to cover fixed costs.

Model returns as a separate outcome. A refunded order loses revenue and may incur return freight or leave a unit that cannot be resold; do not subtract a refund from revenue and count the same refund again as a cost. Before launch, any return allowance is an assumption, not a measured rate.

Read an illustrative order

Let R be retained order revenue, U be saleable product cost, and V be the sum of other order-specific variable costs. Contribution before acquisition is R − U − V; contribution margin is (R − U − V) ÷ R × 100%. If A is paid acquisition cost attributed to the order, subtract A for the after-acquisition result and divide by R for its margin.

For a $100 customer payment including GST and a $40 ex-GST saleable-unit cost, retained revenue is $90.91 and GST is $9.09. Contribution before other order costs is $50.91, and its margin is 56% of retained revenue.

That $50.91 is not the completed order’s final contribution if packaging, payment, pick-and-pack, delivery, support or other variable costs also apply. Subtract the actual amounts for those costs from $50.91, then divide the result by $90.91 to get the completed order’s margin.

The product-cost spread, R − U, leaves out other order-specific costs. Contribution before and after acquisition are not net profit; compare total contribution with fixed launch costs and the order mix.

Test the offer before announcing it

Recalculate at the proposed price after a planned discount, using the highest delivery subsidy the offer permits and the relevant paid-acquisition cost. For a bundle, calculate its revenue and packing or delivery costs separately.

On the $100 GST-inclusive example, a 10% discount makes the customer payment $90, or $81.82 excluding GST. With the same $40 ex-GST product cost, contribution before other order costs is $41.82 and the margin is 51.1%; subtract the other actual order costs to get the order result.

For the $10 shipping charge on orders of $99 or less and free shipping above $99, test the applicable tier against the order’s full delivery cost. A free-shipping offer may require including delivery in the product price or accepting less contribution.

Compare each result with the business’s required contribution and fixed costs, and consider the cash needed before customer receipts arrive. A cash flow forecast can help predict shortages and surpluses; label estimated costs clearly and state whether figures include or exclude GST.

Before publishing, check the displayed price against ACCC price-display information. The ACCC may investigate suspected breaches of price-display law but does not give businesses legal advice.