Contribution Margin vs. Gross Margin

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

The contribution margin is the same as the gross margin but without the fixed costs included.

It includes only direct costs and variable costs.

This means the contribution margin will always be the same or higher than the gross margin.

The contribution margin is used for setting the selling price of a product and determining the profitability of the product.

Fixed costs are considered sunk costs and should not be used in the calculation of product prices.

Contribution margin can be used to understand the profitability of each product as it eliminates non-direct costs from the equation.

The profits from the contribution margin calculation can be applied to the company’s overhead.

Consider using contribution margin in your pricing and product performance calculations.

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