Contribution Margin

What each additional sale contributes after its own variable costs, before fixed costs. It shows how much every extra unit helps cover overhead and, eventually, profit.

Contribution margin = revenue per unit - variable cost per unit

Why it matters

Contribution margin is the truest test of whether selling more actually helps: if it is negative, every sale digs the hole deeper. It underpins pricing, unit economics, and the break-even math.

For example

A product sells for 1,000 with 300 of variable cost, a 700 rupee contribution margin that goes toward covering fixed costs and profit.

Go deeper

What is the difference between gross margin and contribution margin? AccountingCoach · article This is the cleanest side-by-side we found: it defines both margins in plain language and then walks the exact same $600,000 sales figure through both formulas, so you see gross margin land at 46.7% and contribution margin at 73.3% on identical numbers. The punchline is the one founders miss: gross margin strips out all product costs (fixed and variable), while contribution margin isolates only the variable costs, which is what actually tells you whether one more sale earns money. Treat it as your starting point for the vocabulary, not the last word on your own P&L. Open accountingcoach.com →

Related terms

Also in Starting Up

See how founders actually handle this on Money, pricing and metrics, part of the Starting Up hub.

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