Contribution margin

Contribution margin goes one step past gross margin. It subtracts every cost that varies with the sale, not only the cost of goods: commissions, card and platform fees, freight out, packaging, returns, warranty and the direct cost of serving the customer. What remains is the contribution each sale makes toward fixed costs and profit. Fixed costs such as rent and salaried staff are not subtracted, because they do not change with one more sale.

It matters because it ranks things correctly. A product with a strong gross margin and heavy selling costs can contribute less than a plain product that sells itself. A customer who orders often but demands free delivery, extended terms and hours of support can contribute less than a smaller one who pays on time. BC owners who run on gross margin alone regularly grow the wrong lines and keep the wrong customers.

In practice, we calculate contribution margin by product, by customer and by channel from actual data, then use it to set prices, discount limits, commission plans and marketing budgets. It is also the number that feeds break-even and unit economics: once you know what one unit contributes, you know how many units cover the overhead and what each one past that point earns.