Contribution margin is what's left from a sale after subtracting the variable costs of delivering it, the amount each sale contributes toward covering fixed costs and then profit.
Key takeaways
Contribution margin is what's left from a sale after subtracting the variable costs of delivering it, the amount each sale contributes toward covering fixed costs and then profit. You can express it per unit, as a total, or as a percentage of revenue. It's the cleanest way to see how a product's economics actually work.
Formula
Contribution Margin = Revenue − Variable Costs
A product sells for $50 with $20 of variable costs, giving a $30 contribution margin, 60% of the price, toward fixed costs and profit.
Contribution margin drives break-even: divide fixed costs by contribution margin to learn how much you must sell to cover them. It also exposes which products or customers actually make money once variable costs are stripped out. A product with revenue but negative contribution margin loses more the more you sell it.