Contribution Margin
Contribution margin is revenue per customer minus variable costs (COGS). Shows how much each sale contributes to covering fixed costs and profit.
What Is Contribution Margin? How to Calculate It for SaaS
Formula: Contribution Margin = Revenue per Unit - Variable Costs per Unit. Example: sell software for $100/month, costs $20/month to serve (hosting, support). Contribution margin is $80/month. This $80 goes toward covering fixed costs (salaries, rent, marketing). Once fixed costs are covered, it becomes profit. Higher contribution margin means faster path to profitability.
Examples
You charge $50 per month for a subscription. Hosting, support, and payment processing cost $12 per customer per month. Contribution margin is $50 minus $12, or $38 per customer per month, which is what each subscriber contributes toward covering your fixed costs like salaries and rent.