At Alunta we have decided to createa a dictionary for words and important terms related to running a subcription busniess. You are now reading about “Contribution margin”.
The contribution margin ratio is the percentage of each sale that is pure profit after accounting for variable costs in a business. In a subscription-based business model, it's critical for understanding how much of the subscription fee contributes to covering fixed costs and generating profit. A high contribution margin ratio indicates that a large portion of the revenue from each subscription goes towards profitability. It also means that the business has more flexibility in how it prices its subscriptions, which can be a competitive advantage.
The contribution margin is critical in determining the break-even point for a service business. The break-even point is the point at which total revenues equal total costs, meaning the business is neither making nor losing money. By knowing the contribution margin, a business can calculate how many units of a service it needs to sell in order to break even. In other words, the higher the contribution margin, the fewer units the business needs to sell to cover its fixed costs and start making a profit.
Check out other topics in our subscription dictionary below. We've gathered the ones we find most relevant in relation to contribution margin.
