Contribution margin is the selling price minus every variable cost of the sale: the product, the freight to the customer, payment fees, commission and any rebate paid on it. Per unit, a bearing sold at $16.90 with $12.00 of variable cost contributes $4.90. As a ratio, that is 29% of the price. It shows how much each sale adds toward fixed costs and profit, which makes it the right base for discount and quote decisions.
The contribution margin formula
Contribution margin is revenue minus variable costs. Per unit, it is the selling price minus the variable cost of that unit. As a ratio, divide the result by the price.
Which costs are variable for a distributor
- Variable: moves with each sale
Landed product cost, outbound freight, card and payment fees, sales commission, customer rebates.
- Fixed: there either way
Rent, warehouse staff salaries, software, insurance, management.
Some costs sit in between. Warehouse labour rises with volume over a year but not with a single order, so most distributors treat it as fixed for quote decisions. Pick a rule and apply it the same way every time, or contribution margins will not be comparable between months.
A worked example
A distributor sells a 6205-2RS bearing at $16.90. Landed cost is $11.60 and freight and card fees add $0.40 per unit. Variable cost is $12.00, so contribution margin is $4.90 per unit, a ratio of 29%.
- Landed cost
- $11.6068.6%
- Freight and fees
- $0.402.4%
- Contribution margin
- $4.9029%
On an order of 300 bearings that is $1,470 of contribution toward the business's fixed costs. If those fixed costs come to $180,000 a month, the business needs about 37,000 bearings' worth of contribution at this rate to break even, before it makes a dollar of profit.
Contribution margin vs gross margin
Gross margin is what accountants and benchmarks use. Contribution margin is what a pricing decision needs, because freight, fees and rebates are real costs of the sale even though they sit below gross margin on the income statement.
Why it matters for pricing
Contribution margin shows how much room a discount really has. At a 29% ratio, a 10% discount removes more than a third of the contribution on that line. Pricing teams that look only at gross margin percentage often miss how fast discounts eat into it.
Use contribution margin, not list price, as the base when you set discount limits.
Contribution margin by customer
Two customers buying the same bearing at the same price can have very different contribution margins. One orders 300 at a time, pays by bank transfer and collects. The other orders 10 at a time, pays by card and gets free delivery. The second customer's contribution per unit can be half the first's. Calculating contribution margin per customer as well as per item shows which accounts really pay for the business.
How to improve contribution margin
- Charge freight on small orders, or set a minimum order for free delivery.
- Steer large accounts to cheaper payment methods.
- Tie customer rebates to growth rather than to volume the customer would buy anyway.
- Price quote lines on contribution, so discounts stop at a real floor.
A pricing engine that knows the freight terms, payment method and rebate for each customer can show the contribution margin on every quote line, so the rep sees the number that actually pays for the business.
Contribution margin calculator
- Cost
- $11.60
- Margin kept
- $4.79
- Rebate paid
- $0.51
Common questions
No. Contribution margin is what a sale leaves after its variable costs: the product, freight out, card fees and commission. Profit is what is left after you also pay the fixed costs, such as rent, salaries and software. A line can have a healthy contribution margin and the business can still lose money if fixed costs are higher than the total contribution.
It depends on your fixed costs. If rent, wages and overhead come to 22% of revenue, a 30% contribution margin leaves 8% as operating profit. If they come to 32%, the same 30% loses money. Compare the ratio to your fixed costs as a share of sales, not to a benchmark from another industry.
Gross margin subtracts only the cost of goods sold. Contribution margin subtracts every cost that moves with the sale, which for a distributor usually adds outbound freight, payment fees, commission and rebates paid to the customer. Contribution margin is the better base for discount and quote decisions because it shows what the line really adds.