Foundation 15 of 20 · Analyze
What Is Contribution Margin? When to Discount Your Price
Busy at a Loss Is Still a Loss.
"Why am I losing jobs unless I'm the cheapest?" If you win jobs by going under the other guy's price, you might be paying to work. Here is what contribution margin is, how to set a minimum price, and when a discount is actually safe.
Last Updated: 10/25/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
What Is Contribution Margin?
Textbook Definition
Contribution margin is a product's or job's selling price minus its variable costs. It represents the amount available to cover fixed costs and generate profit, and can be expressed per unit, in total, or as a ratio of sales.
In Plain English
Contribution margin is what a job leaves after the costs that only exist because you took it, like materials, fuel, and the crew's hours. That leftover helps pay your rent, insurance, and other overhead. If it is negative, the job costs you money.
Why It Matters
Why Does Winning on Price Leave Owners Broke?
Because most owners who compete on price know the customer's number to the dollar and guess at their own. They find out what the competitor charged and go under it. They never ask the real question: what does this job cost me to do?
Every job has two kinds of cost. Variable costs happen only because you took the job. Overhead happens either way. When a discount eats more than the job's contribution, you work for free, or worse, to keep someone else's price honest.
Signs you have this problem:
- You win jobs by finding out the competitor's price and going under it.
- You have never worked out what a typical job costs you to do.
- You are busier than ever and have less in the bank.
- You take jobs at any price because "some money is better than none."
- You do not have a price you will not go below.
- Your biggest job of the year made you nervous instead of excited.
What It Looks Like
What It Looks Like to Win Every Job and Lose Every Coin
From the Fabled Forest · Chapter 15
Dumpster Dani was busier than ever, two trucks every day, and had less in the bank than in the spring. She had just won the library's big moving job by bidding a hundred coins against the coast movers' two hundred and Talon and Beak Freight's hundred and ten. She won jobs the same way every time. She went under.
Doctor Owl asked what the library job would cost her to do. Drivers, fuel, and wear came to twelve coins a day, for ten days: a hundred and twenty. Her ledger showed eight days last month where she had gone under and lost a coin a day. Twenty days of driving had made her four coins.
Dani refused the Talon trick of making it back on extras. She went to the library and told the truth. The librarian found thirty more coins. Dani set a floor of fifteen a day, turned down jobs below it, and made twenty-four coins the next month while driving four fewer days.
Dani's story is Chapter 15 of Accounting and Finance for Small Businesses, Book 2 of Dr. Paul's Fabled Forest Business School Series.
The Fix
How to Find Your Contribution Margin and Floor Price in 5 Steps
Do this for one typical job first. Then use it on every quote.
List the costs that exist only because you took the job.
Materials, fuel, crew wages for the job, equipment rental, wear. If you would not pay it without the job, it is a variable cost.
Subtract them from the price.
That is the job's contribution margin. Positive means it helps pay the overhead. Negative means it takes from it.
Find each job's share of overhead.
Add up a month of overhead and divide by your usual number of jobs, or working days if job lengths vary. That is the roof each job needs to carry.
Set your floor: variable cost plus overhead share.
That is your minimum price. Below it, as a rule, say no. Above it, discount if you choose to.
Use the one exception on purpose.
If a day would otherwise sit empty, a job between variable cost and the floor still puts a little toward overhead. Take it now and then, deliberately. Never just because a competitor went lower.
Dr. Paul's Insight
When you discover you bid a job too low, you have three choices: eat the loss, quietly make it back with surprise charges, or go back and tell the customer the truth. The second one wins the job and loses the customer, and everyone they talk to. The third one feels terrible for ten minutes and often works. Customers remember the business that told them the truth before the bill arrived.
Sample: A Floor Price Worksheet
Work out the floor once. Check every quote against it.
| Line | Amount |
|---|---|
| Crew wages for the day | $800 |
| Fuel | $300 |
| Tires, oil, and wear | $100 |
| Variable cost per day | $1,200 |
| Overhead share ($6,000 a month ÷ 20 days) | $300 |
| Floor price per day | $1,500 |
| Regular price per day | $1,800 |
Sample for illustration. Below the floor, say no. Between $1,200 and $1,500, only to fill a day that would sit empty.
The Shortcut That Costs More
Win It Cheap, Make It Back on Extras?
In the book, a company called Talon and Beak keeps offering owners shortcuts. Every one sounds reasonable. Every one works for a while. Every one costs more than it saves. Here is the one in Chapter 15.
Win the job with a low bid, then make it back with stairs fees, heavy-item fees, and gate fees written into the contract's small print.
You win every bid, and the real bill arrives after the work is done.
Customers feel tricked and say so to everyone. The next time you bid, nobody believes your number.
A low bid that only works because of hidden extras is not a price. It is a trap. Set an honest floor, quote above it, and put every charge on the front page.
Watch
Video: Contribution Margin and Your Price Floor
What Is Contribution Margin? When to Discount Your Price
Dr. Paul calculates contribution margin and a floor price for a service business on screen.
From the Book
What Does the Job Cost You to Do?
Chapter 15 · Discounting and Contribution Margin
Winning Every Job, Losing Every Coin: A Raccoon's Bid
"Dani," said Doctor Owl. "What does the library job cost you to do?"
"Cost me?" Dani looked up for the first time. "I don't know. I didn't work that out. I worked out what the coast movers charged."
"Then work it out now. You have the ledger."
What did the biggest job in the forest really cost Dani, and what did she do about it? Find out in Chapter 15. Book 2 of Dr. Paul's Fabled Forest Business School Series.
Get the Book on Amazon →FAQ
Contribution Margin Questions
How do you calculate contribution margin?
What is the difference between contribution margin and gross margin?
When is it safe to give a discount?
What is a minimum price?
Keep Going
Related Foundations
Contribution margin connects four foundations: pricing above it, break-even below it. New to a term on this page? Every one is in the accounting and finance glossary.
Foundation 14 · Pricing Strategy
Your floor sits underneath the price you set with the three numbers.
Foundation 8 · Overhead and Profit Margin
Contribution margin is the job-by-job view of your margins.
Foundation 19 · Break-Even Analysis
Contribution per job is the bottom half of the break-even formula.
Foundation 12 · Accounts Receivable
A profitable job only helps if the customer actually pays for it.
Written by Dr. Paul Borosky, DBA, MBA, business consultant, author, and educator with an MBA focused in finance. Want help setting floor prices for your services? See fractional CFO services.
This page is for general educational purposes only. It is not legal, financial, tax, accounting, or lending advice. Tax rules change by place and by year. Dollar figures are illustrations. The Fabled Forest and its characters are fictional. For decisions about your own business, consult a qualified professional.