Definition: Contribution margin is the revenue remaining after subtracting the variable costs that go into producing a product. Contribution margin calculates the profitability for individual items that a company makes and sells. Specifically, contribution margin is used to review the variable costs included in the production cost of an individual item. It is a per-item profit metric, whereas Gross Margin is a company's total profit metric.

In Plain English: Contribution margin is the amount of money you have left after creating or performing an individual product or service. This is different from the gross margin, which includes all products sold in a time period.

Example: If you sold two shoes for $100 each and the shoes took $40 each in cost of goods sold to create, the contribution margin would be $100-$40=$60 and the gross margin would be $200-$80=$120

Contribution margin, similar to gross margin, helps tell you the efficiency of a product/service’s production process. It is different from gross margin because it tells you about a specific product/service rather than all products/services sold in a time period.