Contribution MarginvsBreak-Even Point

Contribution margin measures how much revenue from each unit sold contributes to covering fixed costs and generating profit after variable costs are subtracted. If you sell a subscription for $100/month and the variable costs (hosting, support, payment processing) are $20/month, your contribution margin is $80 (80%). This is the TRUE profit engine — every additional dollar of revenue at 80% CM adds $0.80 directly toward covering fixed costs. Once fixed costs are covered, contribution margin becomes pure profit. DoorDash operated at negative contribution margin for years (-$1.50 per order in 2019), meaning they lost money on every single delivery before even counting corporate overhead.

The break-even point (BEP) is when total revenue equals total costs — the moment you stop losing money and start making it. For a SaaS company: BEP in customers = Fixed Costs ÷ (ARPU − Variable Cost per Customer). If your monthly fixed costs are $50K, ARPU is $100, and variable cost per customer is $20, you need 625 customers to break even ($50K ÷ $80). Below 625 customers, every month burns cash. Above 625, every customer contributes pure margin. Most SaaS companies take 2-4 years to reach BEP, and VCs typically expect a clear path to BEP within the fundraising runway.

The trap is confusing contribution margin with gross margin. Gross margin includes ONLY cost of goods sold. Contribution margin includes ALL variable costs — sales commissions, payment processing, variable customer support, transaction costs. A SaaS company might report 85% gross margin but have 55% contribution margin once you include the 15% variable sales commission and 15% variable support cost. Fundraising on 85% gross margin while operating on 55% contribution margin creates dangerous investor misalignment about unit economics health.

The trap is calculating break-even on CURRENT costs while planning for FUTURE growth. If you need 625 customers to break even today, but your growth plan requires hiring 5 engineers ($60K/month) before you reach 625, your real break-even just jumped to 1,375 customers. Every hire, every tool subscription, every office lease MOVES the break-even target. Founders who show investors '6 months to break-even' and then hire aggressively find that break-even keeps receding like a mirage. Track your 'break-even velocity' — are you approaching it or is it running away from you?

List every cost that increases or decreases proportionally with each additional customer or sale. These are your variable costs. Subtract them from revenue per unit. Contribution Margin = Revenue per Unit - ALL Variable Costs per Unit. Then calculate your break-even: Fixed Costs ÷ CM per Unit = Units needed to break even. Track CM by product line and by customer segment — you'll often discover that 20% of your product mix has negative contribution margin, subsidized by the other 80%.

Build a dynamic break-even model with two scenarios: (1) 'Flat cost' BEP: assuming no new hires or cost increases, how many customers/revenue until you break even? This is your floor. (2) 'Growth plan' BEP: including planned hires and investments, when do you actually break even? This is your real target. Update monthly. The gap between these two numbers is your 'growth cost.' If growth-plan BEP is more than 3x flat-cost BEP, your growth plan is burning more runway than it's building revenue.