Contribution margin (CM) is the selling price of a product or service minus all its variable costs. It answers a deceptively simple question: how much of each sale actually goes toward covering your overhead?
The Formula
Unit CM = Selling Price − Variable Cost per Unit
CM Ratio = Unit CM ÷ Selling Price × 100
If you sell a software subscription for $99/month and your variable costs (payment processing, hosting, support) are $15/user, your Unit CM is $84 and your CM Ratio is 84.8%.
Contribution Margin vs. Gross Margin
The terms are often confused:
| Metric | Subtracts |
|---|---|
| Gross Margin | COGS (may include fixed overhead allocated to production) |
| Contribution Margin | Only truly variable costs |
For pure SaaS, they are nearly identical. For a manufacturer, gross margin includes depreciation of equipment and plant overhead; contribution margin does not.
Why It Matters
- Break-even analysis: Divide fixed costs by Unit CM to find break-even units.
- Pricing decisions: A higher CM ratio means more of each price increase goes straight to profit.
- Product mix decisions: In a multi-product business, prioritize the products with the highest CM ratio — they cover overhead fastest.
Calculate your contribution margin at the Contribution Margin Calculator.