Finance
Contribution margin
The amount of revenue per unit (or per customer) that remains after subtracting variable costs — the metric that determines how much each sale contributes to fixed costs and profit.
In plain English
Price minus the costs that scale directly with each sale. What's left over each time you sell a unit, before paying for rent, salaries, and other fixed costs.
Example
You sell a SaaS subscription for $100/mo. Hosting and support per customer = $15/mo. Payment processing = $3/mo. Contribution margin = $100 - $18 = $82/mo per customer (82% contribution margin).
Formula
Contribution margin = Revenue per unit − Variable costs per unit Contribution margin % = (Revenue − Variable costs) / Revenue
Why it matters
Contribution margin determines how many customers you need to cover fixed costs and how much pricing power you have. Healthy SaaS: 80%+. DTC physical product: 40-70%. Service business: 20-40%. Below these and your unit economics need fixing before you scale.
Common mistakes
- Confusing contribution margin with gross margin — gross margin includes some semi-fixed costs (allocated infrastructure, customer success); contribution margin is purely variable
- Ignoring soft variable costs — support hours per customer scale with customers; if not modelled, your contribution margin is overstated
- Treating early customers' contribution margin as predictive — early customers often get manual handholding that doesn't scale
- Comparing across business shapes without context (SaaS vs DTC vs services have very different healthy bands)