Why contribution margin matters to a first-time founder
Contribution margin is what remains from a sale after you subtract the variable costs. That remainder is what the sale contributes towards fixed costs, and then towards profit. It is the number that tells you whether one more sale helps.
Examples of contribution margin
A customer pays £240. The variable costs on that sale are a £7.20 payment fee and a £30 affiliate bounty, £37.20 in total, so the contribution margin is £202.80. That money goes towards the £800 rent and other bills that do not grow with sales. Four such customers bring in £811.20, which covers the rent. What is left is still not profit while salaries and other fixed costs remain uncovered.
Common misunderstanding
People treat contribution margin as gross profit. Gross profit subtracts the cost of goods sold, which can include fixed production costs. Contribution margin subtracts every cost that rises with each sale, including payment fees and sales commissions that never go into cost of goods sold. The two match only when all cost of goods sold is variable and there are no variable selling costs. Using the prettier figure makes the rent look covered when it is not.
When to use it
Use it when you are about to buy a customer, with ads or a bounty, and you want to know what is left afterwards. If the bounty and the fees swallow the sale, do not buy more of those customers.