What is Contribution Margin?
Contribution Margin is your top-line sales minus discounts, refunds, returns, product costs, and marketing costs. In short, it is your sales revenue minus variable costs.
Here's Jeremy Horowitz, Daasity's Dir. of Marketing, for more on contribution margin:
Why is contribution margin important?
Simply put, contribution margin is important because it reveals how profitable your business is. It is a vital metric that is absolutely necessary over time—ideally, weekly, if your brand is able to do so. By tracking contribution margin, you can understand what costs you must cut back on, and what you can increase investment in.
If you have a negative contribution margin, you are losing money on every product you make. This means you need to increase the prices of your product(s), or perhaps discontinue that particular product after you've sold out of your inventory.