one-line definition
Contribution margin measures how much of each revenue dollar remains after covering the variable costs directly tied to serving that customer.
formula: Contribution margin = (Revenue − Variable costs) ÷ Revenue × 100
tl;dr
For SaaS, variable costs are hosting, third-party API calls, payment processing, and support. A healthy SaaS contribution margin is 70-85%. If yours is below 60%, your infrastructure or API costs need attention before you scale.
Simple definition
Contribution margin tells you how much money each customer actually contributes toward covering your fixed costs and generating profit, after you subtract the variable costs of serving them. It determines whether more customers make you richer or poorer. If your contribution margin is negative, every new customer costs you money — growth makes things worse, not better.
How to calculate it
Subtract variable costs from revenue, then divide by revenue.
Formula: Contribution margin = (Revenue - Variable costs) / Revenue x 100
Example: You charge $29/month. Variable costs per customer: $2.50 hosting, $3.00 OpenAI API calls, $1.14 Stripe fees (2.9% + $0.30). Total variable costs: $6.64. Contribution margin = ($29 - $6.64) / $29 x 100 = 77.1%. That means $22.36 of each $29 goes toward covering your fixed costs (domain, tools, your salary) and profit.
Example
You run an AI writing assistant charging $19/month. Your OpenAI API costs average $5.20 per user, Stripe takes $0.85, and server costs per user are $0.60. Variable cost total: $6.65. Contribution margin: ($19 - $6.65) / $19 x 100 = 65%. That's below the healthy 70-85% range. You investigate and find that 15% of users generate 60% of API costs through heavy usage. You introduce a usage tier: the base plan includes 50 generations/month, with a $29 plan for unlimited. Heavy users upgrade or self-limit, and your average contribution margin rises to 78%.
Related reading
Related terms
- Gross Margin
- Unit Economics
- COGS
FAQ
What's the difference between contribution margin and gross margin?+
Gross margin subtracts cost of goods sold (COGS) from revenue. Contribution margin subtracts all variable costs, which may include COGS plus variable sales, support, and transaction costs. Contribution margin is usually lower and more accurate for decision-making.
What variable costs should indie SaaS builders include?+
Hosting and infrastructure (per-user portion), third-party API calls (OpenAI, Twilio, etc.), payment processing fees (Stripe's 2.9% + 30 cents), and any per-customer support costs.