What is Contribution Margin?
Nexa Consultancy | Startup & Finance Glossary
Contribution margin represents the revenue from a sale that is left over to cover fixed costs. It is calculated by subtracting all variable costs associated with a unit from its selling price.
For Startups: A positive contribution margin is a prerequisite for a viable business model. It means that each sale is helping to pay down fixed costs and eventually contribute to profit. A negative contribution margin means you lose money on every sale. You can use our Breakeven Calculator to help with this.
For SaaS: SaaS businesses typically have a very high contribution margin, as the variable costs per customer are low.
Calculation: Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit
Example: A product sells for ₹100 and has variable costs of ₹40. The contribution margin is ₹60.