Contribution margin ratio (CM ratio)

Contribution margin as a percentage of revenue: (Revenue − Variable costs) ÷ Revenue. The share of every sales dollar left over to cover fixed costs and then become profit.

Example

A £100 sale with £30 of variable costs has a £70 contribution margin and a 70% CM ratio. Every extra £1 of revenue puts 70p towards your fixed costs.

Important

It is the single most useful number for answering "what happens if we sell more?". Divide your fixed costs by the CM ratio and you have your break-even revenue — no model required.

Related terms

  • Contribution margin — Revenue from a unit minus all the variable costs of producing and selling that unit — a step beyond gross margin because it also includes variable selling costs.
  • Break-even point — The level of sales at which total contribution margin exactly covers fixed costs, so profit is zero. Fixed costs ÷ CM ratio gives it in revenue; fixed costs ÷ contribution margin per unit gives it in units.
  • Fixed costs — Costs that do not change with sales volume in the short term — rent, salaries, software subscriptions, insurance.
  • Variable costs — Costs that rise and fall directly with each additional unit sold — payment fees, per-seat API costs, shipping, delivery labour.
  • Gross margin — Revenue minus the direct cost of delivering it, as a percentage of revenue.

Lessons that explain it

  • Contribution margin and the CM ratio — How much of each sale is left to cover everything else. One number, and it answers most of the questions founders take to spreadsheets. (13 min)
  • Break-even and operating leverage — The revenue that makes you self-sufficient, and why the same structure that makes growth spectacular makes a bad quarter dangerous. (12 min)
  • Building a financial model that is worth having — Three drivers, eighteen months, one page. The value is in the assumptions you can defend, not the projections you cannot. (14 min)

All 176 terms in the Founder glossary