Contribution margin
Contribution margin is what is left from each sale after taking out variable costs and expenses, the ones that exist only because the sale happened: materials, sales taxes, commissions, card fees, shipping.
Contribution margin = price − variable costs − variable expenses
That amount is not profit yet. First it pays the fixed costs (rent, salaries, software). Whatever is left after that is profit.
Example
A service sold for R$100 has R$35 in variable cost and R$15 in taxes and commission. The contribution margin is R$50, or 50% of the price.
If the company’s fixed costs are R$20,000 a month, it needs R$40,000 in revenue (20,000 ÷ 50%) just to break even. That is the break-even point. Every real sold above it leaves R$0.50 of profit.
What it’s for
- Comparing products: the best seller is not always the biggest contributor.
- Deciding on discounts: a 10% discount on a product with a 50% contribution margin removes 20% of what it contributes.
- Knowing whether growth pays: if the contribution margin is low, selling more adds work faster than it adds results.
One caution: contribution margin and profit are not two separate leftovers. Profit comes out of the contribution margin, after the fixed costs are paid.