Contribution Margin
Definition
Contribution margin is revenue per customer minus variable costs (COGS). Shows how much each sale contributes to covering fixed costs and profit.
Extended Definition
Formula: Contribution Margin = Revenue per Unit - Variable Costs per Unit. Example: sell software for $100/month, costs $20/month to serve (hosting, support). Contribution margin is $80/month. This $80 goes toward covering fixed costs (salaries, rent, marketing). Once fixed costs are covered, it becomes profit. Higher contribution margin means faster path to profitability.
Related Terms
Gross Margin
Gross margin is revenue minus cost of goods sold, expressed as a percentage. Shows how much profit you keep after delivering your product or service.
Unit Economics
Unit economics measures profitability per customer. It's the revenue one customer generates (LTV) minus the cost to acquire and serve them (CAC + COGS). Positive unit economics = you make money on each customer.