Contribution margin is the amount remaining from revenue after subtracting variable costs directly attributable to producing a product or delivering a service. Contribution margin represents the portion of revenue available to cover fixed costs and generate profit: products with higher contribution margins contribute more to fixed cost coverage per unit sold. Contribution margin can be expressed in absolute terms, as a percentage of revenue, or per unit, and is a fundamental measure in profitability analysis and pricing decisions.
Why This Matters
Contribution margin separates the variable economics of a product or service from the fixed cost structure of the business as a whole. This distinction is essential for short-term pricing and volume decisions: as long as a product generates a positive contribution margin, selling more of it improves the organisation’s position relative to its fixed cost base. Understanding contribution margins across the product portfolio enables informed decisions about pricing, product mix, and the relative attractiveness of different revenue streams.
Where This Fits
This term sits within the Performance Analysis area of Performance & Control.
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