Contribution Margin vs Gross Margin
Both measure profitability, but they answer different questions. Gross margin tells you if you can produce at a profit. Contribution margin tells you if individual products are worth selling.
Gross Margin
Gross Margin = (Revenue − COGS) / Revenue × 100
Includes only direct production costs (materials, labor, overhead). Shows overall production efficiency. Used for pricing strategy and high-level profitability analysis.
Contribution Margin
Contribution Margin = (Price − Variable Costs) / Price × 100
Includes all variable costs (COGS + variable selling costs). Shows what each sale contributes to fixed costs and profit. Used for pricing decisions and breakeven analysis.
Example
A product sells for $100. COGS is $40. Variable selling costs are $10. Fixed costs are $20K/month.
| Metric | Calculation | Value |
|---|---|---|
| Gross Margin | ($100 − $40) / $100 | 60% |
| Contribution Margin | ($100 − $40 − $10) / $100 | 50% |
| Break-even Units | $20,000 / ($100 − $50) | 400 units |
When to use each: Use gross margin for overall business health. Use contribution margin for per-product decisions — which products to promote, discount, or discontinue.