Finance and accounting
Contribution margin
Revenue minus all variable costs, as an amount or a percent of revenue.
Facts checked against sources onWhat does Contribution margin mean?
Contribution margin is revenue minus all variable costs, including variable selling costs such as commissions and delivery. As a ratio it is contribution divided by revenue: price 4 and variable cost 1 give a contribution of 3 and a contribution margin ratio of 75%. Breakeven revenue = fixed costs ÷ contribution margin ratio. It differs from gross margin, which subtracts COGS instead of all variable costs.
Where does it come up in case interview prep?
- Unit economics in any businessLesson in How industries work: the toolkit
- Fixed and variable costs, operating leverage, and unit economicsLesson in Business basics for non-business learners
- Who the customer is: segments by need and by valueLesson in Customers and growth: the economics of marketing
- Using this in a case: growth and new product casesLesson in Customers and growth: the economics of marketing
- Incentives: people do what they are paid to doLesson in People, rules and responsibility: organisation, regulation and sustainability
- Diagnosing a profit decline: the reference caseLesson in Profitability
- PricingLesson
- Executive summaries and memosLesson in Saying so what: synthesis and communication at work
Related terms
- ContributionWhat each sale adds after its own variable cost.
- Gross profit and gross marginRevenue minus the cost of goods sold, as an amount or a percent.
- BreakevenThe volume or revenue at which profit is exactly zero.
- ProfitThe money left over after costs. Revenue minus cost.
- RevenueMoney earned from sales, before costs.
- CostWhat it takes to make and sell the product in a period.
- Fixed costA cost that stays the same when volume changes, within a normal range.
- Variable costA cost that rises and falls with how much you make.
Learn it in context
See Contribution margin at work in a lesson from How industries work: the toolkit, with checks as you go.
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