What is the difference between contribution margin and gross margin?

Gross margin only subtracts COGS (hosting, support). Contribution margin subtracts ALL variable costs including sales commissions, variable marketing costs, and payment processing. Contribution margin is broader.

What costs should be included as variable costs?

Sales commissions, payment processing fees, variable hosting costs, customer support per-ticket costs, contractor costs, and any other costs that scale directly with revenue.

How is contribution margin used for pricing?

Contribution margin helps determine minimum pricing. If each sale has 40% contribution margin, you know 60% of revenue goes to variable costs. Set pricing to ensure positive contribution after all variable costs.

How does contribution margin affect scalability?

Higher contribution margins mean more revenue is available for fixed costs and profit. A 80% contribution margin company can scale profitably much faster than a 50% contribution margin company.

Should I calculate contribution margin by product line?

Yes. Different products and services have dramatically different contribution margins. Product-level analysis reveals which offerings are truly profitable.

Can contribution margin be negative?

Yes, if variable costs exceed revenue. This means each additional sale loses money. Products with negative contribution margin destroy value and need restructuring or price increases.

How does contribution margin relate to break-even?

Break-even point = Fixed Costs ÷ Contribution Margin %. Higher contribution margin means fewer sales needed to break even. This is critical for financial planning.

How often should I track contribution margin?

Monthly for operational decisions. Quarterly for strategic planning. Track trends: declining contribution margins signal rising variable costs or pricing pressure.

Contribution Margin Calculator

Calculate your contribution margin - revenue minus variable costs - to understand per-unit profitability.