What is the difference between gross margin and contribution margin?

Gross margin subtracts cost of goods sold (COGS) from revenue. Contribution margin subtracts all variable costs, which may include COGS plus variable sales commissions, payment processing, shipping, and other costs that scale with each transaction. Contribution margin gives a more complete per-unit profitability picture.

What is a good contribution margin?

SaaS: 60-80%. Marketplaces: 40-70% (after payment processing and customer support). E-commerce: 20-50% (after COGS, shipping, returns). The key is that contribution margin must be positive and sufficient to cover fixed costs at the growth rate you are targeting.

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GLOSSARY

Contribution margin

Contribution margin is the percentage of revenue remaining after subtracting all variable costs, before fixed costs. It shows how much cash each unit of sale contributes toward covering fixed costs and generating profit. For marketplaces and e-commerce, contribution margin per order or per transaction is the key unit economics metric, analogous to gross margin for SaaS.