Contribution Margin is revenue minus all variable costs, expressed per unit or as a percentage of revenue: the amount each sale contributes toward covering fixed costs and generating profit.
In cost accounting, contribution margin per unit equals the selling price minus the variable cost per unit, and the contribution margin ratio divides that figure by price. It differs from 📝Gross Margin because it subtracts every cost that scales with volume, not only cost of goods sold but also variable selling costs such as payment processing, commissions, revenue-based referral fees, and the rest of a company's 📝Other Variable Overheads, while ignoring fixed costs entirely. It underpins break-even analysis: fixed costs divided by contribution margin per unit gives the break-even volume.
In direct-to-consumer and marketing-driven businesses the term is often extended to subtract acquisition spend. One operating definition is gross profit less ad spend, divided by revenue, which shows whether customers' orders cover the cost of acquiring them. Businesses with many locations or product lines use contribution margin to judge each unit on its own; a campus, clinic, or channel can be contribution positive before the company as a whole is profitable. That unit-level view is the core of 📝Unit Economics and of a 📝Profitable Revenue Stream.
Contribution margin is the key metric people forget. DTC businesses shouldn't believe they can be unprofitable on a customer's first purchase; that's a mistake. At 📝General Assembly, each campus could be contribution positive long before the entire company.