Contribution Margin
The portion of revenue that remains after deducting variable costs directly associated with producing a product or service.
Definition
Contribution Margin measures how much revenue from each sale contributes to covering fixed costs and generating profit. It helps businesses understand the profitability of individual products or services and make informed pricing and production decisions.
How to Calculate
Formula:
Contribution Margin = Revenue - Variable Costs
Percentage:
Contribution Margin % = (Revenue - Variable Costs) / Revenue × 100
Real-World Example
SaaS Product:
- • Monthly subscription price: $100
- • Variable costs (hosting, payment processing): $20
- • Contribution Margin: $100 - $20 = $80
- • Contribution Margin %: 80%
Each customer contributes $80 monthly toward fixed costs and profit.