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.

Example

$100 revenue, $20 delivery cost and $15 of variable sales commission gives a $65 contribution margin.

Important

It shows what each additional sale actually contributes towards fixed costs. Gross margin can look healthy while contribution margin is thin.

Related terms

• Gross margin — Revenue minus the direct cost of delivering it, as a percentage of revenue.
• Unit economics — The profit or loss on a single customer, once you strip out fixed costs.
• COGS (Cost of Goods Sold) — The direct costs of delivering your product — the costs that rise with each additional customer.
• CAC (Customer Acquisition Cost) — The total sales and marketing spend to acquire one paying customer.

Lessons that explain it

• Fixed and variable costs — The split that decides what happens when you grow, shrink, or have a bad quarter. Most founders classify their own time as neither, and that is where the trouble starts. (11 min)
• 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)

All 176 terms in the Founder glossary