Contribution margin is revenue minus variable costs and shows the amount available to cover fixed costs and profit. It can be measured for a unit, order, product, customer or period, provided the variable-cost definition is consistent.
How is contribution margin calculated?
Contribution margin = revenue − variable costs. Contribution margin ratio equals contribution margin divided by revenue.
Illustrative contribution margin calculation
| Calculation step | Amount | What it means |
|---|---|---|
| Revenue | $100 | Selling price per unit |
| Variable product and fulfillment cost | ($58) | Costs that vary with the unit |
| Payment and marketplace fees | ($7) | Transaction-linked costs |
| Contribution margin | $35 | $100 − $58 − $7 |
| Contribution margin ratio | 35% | $35 ÷ $100 × 100 |
The figures are illustrative. Advertising, returns or service costs should be included when they are variable under the chosen decision definition.
Contribution margin vs. gross margin
Gross margin subtracts cost of goods sold under the accounting definition. Contribution margin subtracts all costs treated as variable for the analysis. The two can differ because fulfillment, transaction or support costs may sit outside cost of goods sold.
How should it be used?
Use contribution margin to assess pricing, promotions, channels, order economics and break-even volume. Do not compare results unless the cost classifications and time periods are consistent.
