Contribution margin

Contribution margin is revenue less the variable costs associated with those sales. It shows how much remains to cover fixed costs and contribute to profit; which costs are treated as variable should be consistent.

It can be expressed per item, as a total amount or as a percentage of revenue. Relevant variable costs may include product cost, transaction fees, sales commissions and per-order delivery expenses. The distinction from gross profit is important because accounting cost classifications and the costs that vary with each sale are not necessarily identical.

For example, a £30 sale with £18 product cost and £4 variable payment and fulfilment costs contributes £8 toward fixed costs and profit. A loss leader can have a negative contribution on its own. Its commercial effect must therefore be assessed with the additional purchases it actually generates.