Both are revenue minus some costs, and depending on which article I read they seem to be either the same thing or completely different. Investors ask for one, the finance textbook teaches the other.
What is the actual distinction, and when does it change a decision?
Accepted Answer
They subtract different things, and the split is by cost behaviour rather than by cost type.
Gross margin is revenue minus cost of goods sold, which is an accounting category. It follows reporting rules and appears on the income statement.
Contribution margin is revenue minus all variable costs, whether or not accounting calls them cost of goods sold. Sales commission, payment processing and shipping usually belong here and often are not in COGS.
The distinction bites when you are deciding whether to take one more order. Contribution margin tells you what that order adds toward covering fixed costs. Gross margin will not, because it may exclude real variable costs and include some fixed ones.
The trap is that in software they often look identical and people conclude they are the same thing.
Hosting scales with usage, support does not scale neatly, and salaries for a customer success team sit somewhere in between. Firms make different choices about what goes in COGS, which is why gross margins are only loosely comparable across companies in the same sector.
Contribution margin is defined by behaviour rather than by convention, so it is the more comparable of the two even though it is the less standardised.
Break even falls straight out of the second one: fixed costs divided by contribution margin per unit gives the units you need. There is no equivalent calculation using gross margin.
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