What is contribution margin?
Contribution margin is what is left from each sale after paying the costs that only exist because the sale happened: the product, the taxes and the fees. That money is what pays for rent, payroll and your own salary. Whatever is left after that is profit.
It answers a question that revenue hides: which products actually keep the business afloat. An item that sells a lot at a thin margin can bring in more work than money.
How to calculate contribution margin
As a percentage: margin ÷ price × 100. Multiply the margin by the month's number of sales to get total contribution. Subtract your fixed costs from that, and what remains is operating profit.
Worked example with the calculator's numbers
| Item | % of price | Amount |
|---|---|---|
| Selling price | 100% | $80.00 |
| Product cost | 35% | − $28.00 |
| Taxes (6%) | 6% | − $4.80 |
| Fees and commissions (5%) | 5% | − $4.00 |
| Contribution margin | 54% | $43.20 |
With 450 sales in the month, total contribution is $19,440.00. After $18,000.00 in fixed costs, the month's profit comes to $1,440.00.
How to use your margin to make decisions
- Where to focus your sales effort: prioritize the products with the highest margin in dollars, not the ones that sell the most.
- How much discount you can afford: in this example, a 10% discount drops the price to $72.00 and the margin to $36.08 (taxes and fees shrink with the price). That is $7.12 less per sale, about 16% of your margin, and you would need 539 sales instead of 450 to earn the same $19,440.
- What your monthly target is: fixed costs ÷ margin = the minimum number of sales. Here, $18,000 ÷ $43.20 = 417 sales. That is your break-even point.
Frequently asked questions
What is the difference between contribution margin and profit?
Contribution margin only looks at the variable costs of each sale. Profit also subtracts the month's fixed costs. A business can have a positive contribution margin and still lose money if it doesn't sell enough to cover its fixed bills.
What is a good contribution margin?
It depends on your industry and volume. As a rule of thumb, margins below 20% need very high volume to cover fixed costs. Custom products and services often run above 40%.
Does shipping count as a variable cost?
Yes, when the business pays for shipping on each sale. Shipping the customer pays separately does not count.
Are sales commissions a fixed or variable cost?
The part that changes with each sale is variable. A salesperson's base salary is a fixed cost.
Educational tool. Results are estimates based on the numbers you enter and are not a substitute for advice from your accountant.