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contribution margin

Also called: unit contribution

What a sale leaves after the costs that come with it (variable costs such as a tutor's payout, payment fees and video minutes). It is what pays for fixed costs and then becomes profit.

Contribution margin is what one unit of sales leaves after the costs that come with that unit: price minus variable costs. For an online lesson those are the tutor's payout, the payment fee and the video bill; for a SaaS seat, usage-based hosting and per-customer support; for a physical product, materials and delivery. What remains contributes first to fixed costs (salaries, rent, tools) and, once they are covered, to profit.

The formula is short: contribution margin per unit = price per unit − variable costs per unit. Multiply it by units sold to get the total contribution of a month. Fixed costs stay out on purpose: spread salaries across units and the "cost per unit" changes with volume, so it can no longer answer the question contribution margin is for: what does one more unit add?

That makes it the working number for most product decisions: which plan or package to promote, how deep a discount can go, whether a new format pays, and how many units cover the fixed costs (the break-even point). It is not the same as gross margin on a P&L, which subtracts cost of revenue for the company as a whole and may include delivery costs that don't move with each unit while leaving out variable selling costs such as payment fees.

Example

Klasna, an online tutoring school, sells English lessons in packages. In the 16-lesson package a lesson costs 9,920 / 16 = 620 UAH. The tutor gets 390, the payment provider keeps 2.5% (15.50) and video and AI cost 30:

620 − 390 − 15.50 − 30 = 184.50 UAH per lesson, or 2,952 UAH per package.

Package
Price per lesson
Contribution per lesson
Per package
8 lessons
650
213.75
1,710
16 lessons
620
184.50
2,952
32 lessons
580
145.50
4,656

The 40-hryvnia discount of the 32-pack comes almost entirely out of contribution: the tutor and the video bill cost the same. The bigger package earns less per lesson and more per package, so whether promoting it pays depends on what the family would have bought otherwise.

Common mistakes

  • Subtracting a share of fixed costs. The number then changes with volume and stops saying what one more unit adds.
  • Using the list price. Use what customers actually pay after discounts, package prices and refunds.
  • Forgetting small variable costs. Payment fees, usage-based infrastructure and AI inference add up per unit.
  • Comparing per unit only. A bigger package can earn less per unit and more per customer; compare the options the customer really has.
  • Calling it gross margin. The P&L line uses different cost groupings; say which one you mean.

Learn it in the course