Do You KNOW the Difference between Gross Profit and Contribution Margin?
Transcript
All right. Today we're going to talk about the difference between gross profit and contribution margin. Two terms that are very similar and people get confused all the time. I want to make sure you understand the differences so that you use them properly and you don't risk credibility in using them improperly in an investor meeting. So both of these concepts are related to how much money you bring in and what the cost of delivering that product or service is. But they're different. You see, gross profit is a different product or service.
profit is generally looking at the whole company how much revenue in total do you bring in in the
period what is the cost of goods sold for those products and services what is any direct packaging
shipping things directly associated with the servicing of those products that is your gross
profit that number or those dollars then go to paying for all the other things the company has
to do contribution margin on the other hand is about an individual product what is its revenue
its cost of goods sold packaging shipping etc and that's the contribution margin from that product
now those sound very similar the difference is the contribution margin is kind of an individual
photograph and gross profit is sort of a group photo but there is one subtle other difference
there are some costs that are difficult to allocate to an individual product but are
necessary for the company to run for shipping all of the products an example might be a warehouse
manager the cost of that warehouse manager will get baked into gross profit or subtracted from
the gross profit but it will not appear anywhere in the contribution margin because the warehouse
manager isn't necessary for any single product but it's necessary for operating the company as a whole
hopefully this clarifies the difference and you understand the difference now and we'll use the
terms properly between contribution margin the single photograph gross profit the group photo
and it'll make you more effective at running your business and hopefully make it an easier time
raising money
Do you know the difference between Gross Profit and Contribution Margin? These are two terms that are very similar and often confused. Getting it right can help you, especially when communicating with investors! Here is Troy’s simple explanation.
Originally published on the MATH Venture Partners blog.