Glossary
Contribution margin
The difference between selling price and variable costs. It shows how much each unit sold contributes to covering fixed costs and generating profit.
What is the contribution margin
The contribution margin is the difference between the selling price and the variable costs of a product or service. It represents the contribution each unit sold makes toward covering the company's fixed costs and, once the break-even point is passed, toward generating profit.
Formula: Contribution margin = Selling price – Variable costs
How it differs from gross margin
Traditional gross margin (price – material cost) doesn't include items like direct labor, subcontracting, or proportional energy. The contribution margin includes all of them, providing a more realistic view of per-product profitability.
An example
| Product A | Product B | |
|---|---|---|
| Selling price | € 100 | € 80 |
| Variable costs | € 65 | € 70 |
| Contribution margin | € 35 (35%) | € 10 (12.5%) |
Product A contributes €35 per unit toward covering fixed costs. Product B only €10. A difference that gross margin (based only on materials) might hide.
What it's used for
- Deciding how to respond to a discount request with concrete data
- Calculating the break-even point (fixed costs / average contribution margin)
- Evaluating the most profitable product and client mix
- Understanding why revenue grows but profit doesn't
Learn more: Contribution margin — the full article | Margin