What is contribution margin?
Contribution margin is the revenue left after variable costs, the money each sale contributes toward fixed costs and profit. It can be read as a dollar figure or as a percentage of revenue.
It answers a question gross margin does not. By taking out every cost that scales with volume, not just cost of goods, it shows what a sale truly adds before the fixed costs of running the business.
The contribution margin formula.
Contribution margin = revenue minus variable costs. The contribution margin ratio is that figure divided by revenue, times 100, expressed as a percent.
This tool calculates both ways. Use totals for a product line or the whole business, or switch to per-unit with a single price and its variable cost.
A worked example.
A product line brings in 100,000 in revenue with 30,000 in variable costs. Contribution margin is 70,000, and the ratio is 70,000 divided by 100,000, which is 70%.
What is a good contribution margin?
It depends on the model, but software tends to run high because variable costs per customer are low, so above 50% is healthy in most cases. The number that matters most is whether it is positive: a negative contribution margin means each sale loses money before any fixed costs are even counted. Track it by product line, since blended figures can hide a weak one.
Contribution margin and gross margin are often confused. Seeing how gross margin differs keeps the two straight: gross margin stops at cost of goods, this goes further.
How to improve it.
Raise prices where the market allows, cut the variable costs tied to each sale, and shift mix toward higher-margin products. Small moves on either side compound across volume.
A customer won through organic search carries no paid acquisition cost, which lifts the margin on everything that follows. That is the case for working to acquire customers who cost less to win.