Contribution Margin
Definition
Contribution margin is revenue minus the variable costs directly tied to producing or delivering one more unit of a product, showing how much of each additional sale is left over to cover fixed costs and profit.
How it comes up in fundraising
Founders use contribution margin to model break-even points and to check whether growth is fundamentally profitable at the unit level before fixed overhead like salaries and rent is even factored in.
Frequently asked questions
How is contribution margin different from gross margin?
Gross margin subtracts all cost of goods sold, some of which can be semi-fixed, from revenue. Contribution margin specifically isolates variable costs that scale directly with each unit sold, making it the sharper input for break-even and pricing decisions.
Why do investors care about contribution margin at an early-stage company?
A negative or thin contribution margin means the business loses money on every unit sold regardless of scale, a structural problem that no amount of growth capital can fix on its own.
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