Contribution margin is revenue minus variable costs: what is left to cover fixed costs and profit. Per customer, it is gross margin less the costs the customer's own behavior causes: rebates, delivery, order handling, sales time, returns and credit.
Contribution margin is revenue minus the costs that vary with it, the amount each sale contributes toward fixed costs and profit. Per customer, contribution is gross margin minus cost to serve. It includes everything that would change if the customer changed how they buy, or left, and nothing that would not. It is the level to manage customers on, in currency rather than percent. Allocating fixed overhead below it adds no information and invites dropping customers who are paying toward costs that would remain. See gross margin versus contribution versus net margin.
Contribution margin = revenue − variable costs, and the contribution margin ratio = contribution margin ÷ revenue. Per customer: gross margin minus rebates and the costs driven by the customer's behavior, each allocated by an activity driver: drops, order lines, visits, returns and days beyond terms.
A customer with $22,500 of gross margin takes 250 drops at $38, 2,400 keyed lines at $1.90 and 12 visits at $85. Contribution is $22,500 − $9,500 − $4,560 − $1,020 = $7,420.
Costs allocated by revenue, which gives every customer the same percentage and shows nothing.
For the ratio, the break-even link and a worked example, see contribution margin ratio.