Contribution margin

Contribution margin is Revenue - Variable costs, calculated per unit or across a whole product line. Variable costs are the ones that scale with volume, such as materials, per-transaction fees, or sales commissions, as opposed to fixed costs like rent or salaried overhead that do not change with each additional sale. Expressed as a percentage of revenue, it is the contribution margin ratio.

It differs from gross margin, which only subtracts cost of goods sold; contribution margin subtracts every variable cost, whether or not it is classified as COGS, but leaves fixed costs untouched by design. That makes it the input to break-even analysis: break-even volume equals total fixed costs divided by contribution margin per unit, since each unit's contribution goes first toward covering fixed costs and only then toward profit.

Contribution margin matters for pricing and product-mix decisions, since it shows which products or customer segments are actually adding profit once volume-driven costs are stripped out, information a blended gross margin figure can hide. A common pitfall is misclassifying a cost as fixed when it actually scales with volume, or vice versa, which distorts both the contribution margin and any break-even conclusions drawn from it, and disagreements about which shared costs to include are often resolved through cost allocation choices.