Article · 5 min read

What is the difference between gross margin and contribution margin?

Harold Averkamp (AccountingCoach) · AccountingCoach Free Beginner

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.

• Gross margin subtracts cost of goods sold (fixed and variable product costs); contribution margin subtracts only the variable costs, so the two numbers can be far apart on the same sales.
• Contribution margin is the number for break-even math and per-unit decisions, because it shows how much each sale contributes toward covering fixed costs and profit.
• Same revenue, two very different percentages: healthy gross margin can hide a thin contribution margin once variable selling and delivery costs are counted in.