Contribution Margin
Revenue minus all variable costs, showing how much each dollar of revenue contributes to fixed costs.
Definition
Contribution margin is revenue minus all variable costs (costs that scale with revenue like hosting, payment processing, and variable support). It differs from gross margin in that it may include sales commissions and other semi-variable costs. Contribution margin shows how much each unit of revenue contributes to covering fixed costs (engineering, overhead, etc.) and eventually profit.
Why it matters
A positive contribution margin means the business model works at the unit level. If contribution margin is negative, the company loses money on every sale and cannot grow its way to profitability. This directly affects the company's long-term viability and your equity value.
Example
A delivery company charges $30/order. Variable costs per order: $15 delivery, $5 payment processing, $3 customer support = $23. Contribution margin is $7/order (23%). The company needs enough orders to cover $500K/month in fixed costs.