Finance
Contribution margin
The amount of revenue per unit (or per customer) that remains after subtracting variable costs — the metric that determines how much each sale contributes to fixed costs and profit.
By Maya Okonkwo · Last updated June 16, 2026
In plain English
Price minus the costs that scale directly with each sale. What's left over each time you sell a unit, before paying for rent, salaries, and other fixed costs.
Example
You sell a SaaS subscription for $100/mo. Hosting and support per customer = $15/mo. Payment processing = $3/mo. Contribution margin = $100 - $18 = $82/mo per customer (82% contribution margin).
Formula
Contribution margin = Revenue per unit − Variable costs per unit Contribution margin % = (Revenue − Variable costs) / Revenue
Why it matters
Contribution margin determines how many customers you need to cover fixed costs and how much pricing power you have. Healthy SaaS: 80%+. DTC physical product: 40-70%. Service business: 20-40%. Below these and your unit economics need fixing before you scale.
Common mistakes
- Confusing contribution margin with gross margin — gross margin includes some semi-fixed costs (allocated infrastructure, customer success); contribution margin is purely variable
- Ignoring soft variable costs — support hours per customer scale with customers; if not modelled, your contribution margin is overstated
- Treating early customers' contribution margin as predictive — early customers often get manual handholding that doesn't scale
- Comparing across business shapes without context (SaaS vs DTC vs services have very different healthy bands)