Read TL;DR
- Contribution margin shows how much revenue remains after covering variable costs like hosting, onboarding, and support. Click here to learn how to calculate it..
- Tracking contribution margin helps SaaS finance teams understand product-level profitability, optimize pricing, and align CAC strategy with unit economics.
- While gross margin offers a company-wide view, contribution margin provides sharper insight into per-customer and per-product efficiency.
- Mature SaaS companies typically target contribution margins of 60–75%, with top performers reaching 80% or more.
- Companies can improve contribution margin by reducing cost-to-serve, focusing on high-margin segments, and refining pricing strategies.
Running a SaaS business isn’t just about growing topline revenue. It’s about knowing which parts of your product portfolio are actually profitable. Most leaders track gross margin but this doesn’t tell the full story. It doesn’t tell you anything about the real economics of each product, customer segment, or pricing tier.
If you want to know these things, contribution margin is your go-to metric. It is the fastest way to see if your SaaS business makes money per product, per customer, per sale.
Contribution margin is the amount of revenue left from each sale after subtracting variable costs. In SaaS, variable costs include expenses like hosting, support, onboarding, and third-party fees. What’s left over helps cover fixed costs and eventually drives profit.
In this guide, we’ll discuss how to calculate contribution margin, benchmark it in a SaaS context, and use it to drive smarter pricing, product, and CAC decisions.
Table of Contents
What is contribution margin?
Contribution margin shows how much revenue from each sale is available to cover fixed costs and generate profit, after subtracting variable costs. It isolates profitability at the unit level, making it a sharper decision-making tool than broad metrics like gross margin.
In SaaS, variable costs are the costs that grow with every additional customer or unit sold. By subtracting them from revenue, contribution margin shows whether acquiring or serving that customer actually moves you toward profitability.
Learn more about SaaS metrics here
How to calculate the per-unit contribution margin
Contribution margin can be calculated for both subscription-based businesses and usage-based pricing models. Both can be measured at the per-unit scale, such as individual customers on monthly plans or a number of API calls.
However, with usage-based models, if pricing tiers are complex or variable costs fluctuate, it can get tricky to figure out the exact cost of serving each unit.
In this section, we'll show you how to calculate contribution margin per unit with an example.
Step 1: Identify your selling price per unit
Start by figuring out how much revenue you earn per unit of your product. For subscription businesses, this is usually the average monthly or annual subscription revenue per customer. For usage-based pricing models, define the "unit" clearly, for example, per transaction, per seat, or API request.
Step 2: List all variable costs per unit
Next, identify the costs that increase with each new customer or unit sold. In SaaS, variable costs include:
- Cloud infrastructure (e.g., AWS, GCP) tied to customer activity
- Payment processing or transaction fees
- Customer onboarding and implementation support
- Ongoing customer success costs
- Per-user or per-transaction fees for third-party tools
Step 3: Calculate contribution margin per unit
Use this formula to calculate contribution margin:
Now for an example. Let's say your SaaS subscription is priced at $50/month. That’s your revenue per unit, and your unit is a single customer. To serve each customer, you incur the following variable costs:
- Cloud hosting: $8
- Payment processing: $2
- Customer support: $5
These total $15 per customer.
This $35 helps cover fixed costs like team salaries, office rent, and platform development.
Step 4: Calculate the contribution margin ratio
The contribution margin ratio (CMR) expresses your margin as a percentage of revenue. It tells you what portion of each dollar earned goes toward covering fixed costs and generating profit, after variable costs are covered.
Using our earlier example:
- Revenue per unit: $50
- Variable costs per unit: $15
- Contribution margin: $35
A 70% CM ratio means that 70% of every dollar earned goes toward fixed costs and profit.
What is a good contribution margin in SaaS?
It’s pretty hard to find studies with contribution margin benchmarks. This is probably because what might be considered a “good” SaaS contribution margin can vary significantly from one business to the next based on the business model, product range, and how the company is in its growth journey.
In early stages, SaaS companies often operate with a low or even negative contribution margin due to high onboarding and support costs, and that’s completely normal.
What matters is how your contribution margin evolves.
If your contribution margin per unit improves year over year, that’s a healthy sign. It’s not uncommon for SaaS companies to see contribution margins of -80% to -100% for new customer cohorts in year one.
By year two or three, margins often improve to 60–70% as renewals and expansion revenue kick in. Mature SaaS businesses typically target 60–75%, with best-in-class companies exceeding 80%.
If your contribution margin isn’t improving year over year, that’s a big red flag. It generally means that variable costs are scaling too fast, or pricing isn’t aligned with cost-to-serve.
Contribution margin vs. gross margin
Contribution margin and gross margin may sound similar, but they’re not. Gross margin shows how efficiently you run the business at scale.
Contribution margin shows whether each contract is worth what you’re spending to acquire and serve the customer.
For SaaS finance leaders, both matter—but contribution margin is where unit economics and pricing decisions really come into focus.
Key differences between contribution margin and gross margin
Costs covered
- Contribution margin: Only variable costs (costs that scale with sales, like hosting, onboarding, support)
- Gross margin: All COGS, which may include both variable and allocated fixed costs
Focus
- Contribution margin: Unit-level or short-term decisions or analysis regarding pricing, product viability, CAC, or breakeven
- Gross margin: Business-wide efficiency and long-term financial health
SaaS treatment
- Contribution margin: Excludes fixed costs like salaries, rent, and core development
- Gross margin: May include fixed costs allocated to COGS (infrastructure, support, amortization of development expenses)
Reporting
- Contribution margin: Used for internal analysis; not GAAP-compliant
- Gross margin: GAAP-compliant; used in external financial reporting
Use cases
- Contribution margin: Pricing strategy, CAC alignment, breakeven analysis, and product prioritization
- Gross margin: Investor reporting, trend benchmarking, and company-wide profitability
Why is contribution margin important?
Contribution margin gives SaaS leaders the clearest view into per-unit profitability. It reveals how much of each dollar earned actually contributes to covering fixed costs and driving profit.
- It sharpens pricing strategy: Not all customer segments or product tiers contribute equally. Analyzing contribution margin helps spot high-margin plans or features so that you can push your sales team in the right direction.
- CAC and LTV analysis: Contribution margin defines how much you can afford to spend to acquire a customer without eroding profit. Pairing contribution margin with CAC and LTV gives you a more accurate measure of payback period and marketing efficiency.
- Validates operational scale: Healthy contribution margins signal that your cost-to-serve is under control. This is important for scaling operations without inflating variable costs like onboarding, success, or infrastructure.
- Informs product and feature roadmap: Knowing which features or customer segments generate higher margins allows product teams to prioritize development based on profitability, not just usage or engagement.
Turn contribution margin into a decision-making tool
Contribution margin helps SaaS finance leaders understand true profitability at the unit level. It clarifies which products, customers, or pricing models create value and which do not.
Tracking it consistently allows for faster, more confident decisions around pricing, CAC, and product focus. However, a lot of finance teams struggle to calculate contribution margin consistently, often relying on spreadsheets with data pulled from siloed systems.
Drivetrain changes that. It integrates directly with your billing, CRM, and ERP systems to give you a real-time view of contribution margin by product, customer segment, and sales channel. With Drivetrain, you can:
- Identify underperforming segments dragging down the margin
- Simulate the impact of pricing, discounting, or CAC changes instantly
- Compare contribution margin trends across time, cohorts, or product lines
Drivetrain replaces spreadsheets with a live, flexible model that helps you act on margin data, not just report it.
Learn more about Drivetrain and how it can help you track all your SaaS metrics in real time.
FAQs
Contribution margin measures how much revenue remains after subtracting variable costs like hosting, support, and payment fees. It shows whether each sale moves the business toward profitability.
Gross margin is the difference between the revenue generated from a software product and the cost of delivering that product (also called cost of goods sold or COGS) expressed as a percentage of the total revenue.
The three levels are:
- Per-unit contribution margin: Profitability of a single sale or customer after variable costs.
- Product-line contribution margin: Aggregated margin for a specific product or service line.
- Total business contribution margin: Overall profitability across the company before fixed costs.
A 40% contribution margin means that 40 cents of every dollar earned goes toward covering fixed costs and profit after variable costs are paid. In SaaS, this suggests moderate profitability, but also shows that variable costs may be too high or pricing too low.
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