Contribution margin is revenue from a product or service minus its variable costs, the amount left over to cover fixed costs and generate profit, expressed either as a dollar amount or a percentage of revenue.
Unlike gross margin, which subtracts all cost of goods sold, contribution margin isolates specifically the costs that scale directly with volume (materials, per-transaction fees, sales commissions) from fixed costs that don't change much with volume (salaries, rent, software subscriptions).
It's a useful number for decisions gross margin doesn't answer well, like whether it's worth taking on one more customer or one more unit of volume at a given price. A business can have healthy gross margins overall while still losing money on a specific low-volume product line once its true contribution margin is isolated.
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