Both contribution margin and gross margin measure profitability, but they do so differently and serve different purposes.
What Each Measures
Gross Margin = Revenue − COGS
COGS (Cost of Goods Sold) includes both variable costs AND fixed overhead allocated to production — depreciation, plant rent, salaried manufacturing staff.
Contribution Margin = Revenue − Variable Costs Only
Variable costs change with each unit sold: raw materials, payment fees, shipping, sales commissions.
When They Differ
For a SaaS company with $0.50/user in variable hosting costs, gross margin and contribution margin are nearly identical. For a manufacturer with $2M/year in factory depreciation, CM is significantly higher than gross margin because depreciation is fixed, not variable.
Which to Use for Pricing
Use contribution margin for pricing decisions. You need to know how much each incremental sale contributes to covering your fixed base. Using gross margin (which bakes in allocated fixed costs) can mislead you into thinking a price is insufficient when it is actually profitable at the margin.
Example: - Fixed factory overhead: $500,000/year - Units planned: 10,000 → allocated overhead = $50/unit - Selling price: $200, variable cost: $80, gross margin = $70 (with $50 overhead) - But CM = $120 — each additional unit sold above plan is $120 profitable
Use gross margin for investor reporting and benchmarking against public company comps, where GAAP gross margin is the standard.
Try the Contribution Margin Calculator to model both scenarios side by side.