Contribution margin is what remains from one sale after you subtract the variable costs of that sale. It is the money that contributes to covering your fixed costs and, once those are paid, becomes profit. You can state it in euros per unit or as a percentage of the selling price.
This is the number you use to answer two questions: should you sell this product at all, and how many units do you need?
An example. A bakery sells a sandwich for €6.50. Ingredients cost €2.10, packaging €0.25, and the card fee €0.15. The variable cost is €2.50, so the contribution margin is €4.00 per sandwich, or about 62 percent of the price. Fixed costs are €8,000 a month. €8,000 divided by €4.00 is 2,000 sandwiches per month to break even, which is about 67 per day in a shop open every day.
Founders confuse contribution margin with profit. It is not profit. A product with a €4.00 contribution margin still loses money if you sell only 400 of them against €8,000 in fixed costs.
The second mistake is dropping a product because its percentage looks low. A wholesale order at 25 percent can beat a retail item at 60 percent, because volume decides the total contribution. Compare euros per month, not percentages alone.
The third mistake is ignoring the time a product consumes. A custom cake carrying €30 of contribution margin but taking three hours earns €10 per hour of your time. Six sandwiches per hour earn €24. Divide the contribution margin by your scarcest resource, whether that is hours, oven space, or shelf space.
