What is Contribution margin?
Contribution margin is revenue minus variable cost and shows how much a product contributes to fixed costs and profit. Inventory decisions should not be prioritized by revenue alone. A stockout on a high-margin SKU can be more damaging than one on a higher-revenue low-margin item.
Formula
Contribution margin = net revenue − variable cost
Practical example
A product sells for 80 euros and has 46 euros of variable cost. Its contribution margin is 34 euros.
What teams should remember
- Contribution margin is revenue minus variable cost and shows how much a product contributes to fixed costs and profit.
- Inventory decisions should not be prioritized by revenue alone. A stockout on a high-margin SKU can be more damaging than one on a higher-revenue low-margin item.