Definition
Contribution margin is margin after variable costs, often gross profit minus variable sales, marketing, and support.
Why it matters
Contribution margin is a better input for CAC payback and LTV than gross margin when variable support or onboarding costs are significant.
Pricing implications
If contribution margin is lower than expected, pricing or support costs may need adjustment. Use it to set payback targets and plan thresholds.
Measurement tips
Define which variable costs are included and keep it consistent across reports.
Checklist
- Define variable costs included in contribution margin.
- Separate fixed overhead from variable costs.
- Use contribution margin for payback models.
- Track contribution margin by plan and segment.
- Update cost allocations quarterly.
- Align with finance definitions.
- Avoid mixing gross and contribution margin.
- Validate against actual support and onboarding costs.