[goodJobWalrus]

From wikipedia:

>> Contribution margin, or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.

So, positive contribution margin should imply they covered all the fixed and variable costs, the way I read it.

But then, why do they need to shut down? It looks like their def on "contribution margin positive" is something else after all.

https://en.wikipedia.org/wiki/Contribution_margin

[eldavido]

Interesting. I stand corrected, thanks to HN for teaching me something. Contribution margin is only for variable costs, it doesn't cover fixed costs -- so it doesn't mean positive CM goes to free cash flow, only to fixed cost coverage.

Which brings up another interesting point...I'm not sure how companies like this do cost accounting. When running a traditional business, say, a restaurant, variable costs (labor, food inputs) dominate vs. fixed costs. On the other hand, places like Microsoft spend a ton of cash to build a huge fixed asset (Windows) that gets sold to millions of people over time without any depletion, practically the very definition of a "fixed asset".

I wonder how Spoonrocket allocates their platform R&D in unit economics; how they do this will make all the difference in whether their "contribution margin" is in fact, positive, or not.

It's important to realize that even if a business is, strictly speaking, "profitable", it doesn't mean it's a good business. I don't stand on the corner selling newspapers because it's not a valuable use of my time vs. other pursuits, and a comparable argument can be made for use of shareholder capital, too.

[dsp1234]

Fixed no, variable yes (or else they would just be profitable).

An explanation with an example can be found here[0].

But let's throw out some easy (but completely false numbers).

Assume:

The fixed cost for the entire operation for one month is $1000.

The operation makes 1000 widgets in one month.

A widget can be sold for $2.

Analysis:

If the company sells all 1000 widgets that it made in a month, then it will have revenue of $2000. If each widget had no variable costs, then each widget sold 'contributes' $2 to paying off the fixed costs of the company. $2 is greater than zero, so the company has a positive contribution margin.

Take the same assumptions as listed above, but the variable costs for each widget is $3. If the company sells all 1000 widgets, then it will have a revenue of $2000. However, each sale of the widget contributes -$1 towards the fixed costs of the company. Thus the company has a negative contribution margin.

So the first situation boils down to "we sold a widget for more than it costs to make", and the second situation boils down to "we sold a widget for less than it costs to make". Where "costs to make" includes just the variable costs. Which is what the article implies, "SpoonRocket had reached a positive contribution margin — it was selling meals for more than it cost to cook them."

Note also having a positive contribution margin also doesn't mean the company will ever realistically be profitable. Imagine a scenario where the fixed costs are $100.000 per month, and the contribution margin of each widget was $0.01 (ex: variable costs per widget $9.99, sale price $10). Each widget has a positive contribution margin, but the company would need to sell 10.000.000 per month to actually cover the fixed costs and become profitable.

Edit: had fixed/variable backwards on the first line.

[0] - http://www.accountingcoach.com/break-even-point/explanation/...

[pbreit]

"So, positive contribution margin should imply they covered all the fixed and variable costs, the way I read it."

That's not what the passage you included says. It says it only covers variable costs.

[goodJobWalrus]

Passage no, but TC report says they were contribution margin "positive", which, they way I understood it, implies it should cover fixed costs, otherwise it is still contribution margin-negative (vis-a-vis fixed costs)

So, the passage explains what contribution margin is, but TC is talking about being "contribution margin positive". How would you understand the second term?

[dsp1234]

As I mentioned in an example above, just because you have covered all of your variable costs doesn't necessarily mean that you have the ability to cover all of your fixed costs at a reasonable sales rate. Contribution Margin Positive just means that each widget sold contributes towards fixed costs (as compared to negative, where each widget sold reduces the amount of money available to pay fixed costs), even if that contribution is one cent. So you could be positive by selling a product for $10 that has a variable cost of $9.99, but damn if you'll ever make a profit (where contribution margin * widgets sold > fixed costs).

[mbesto]

> So, the passage explains what contribution margin is, but TC is talking about being "contribution margin positive".

TC has a terrible reputation for using business terms that aren't really generally considered business terms.

[refurb]

The reason it's called contribution margin is because it contributes to the other costs of the company.

I've only ever heard contribution used in the sense of COGS, not foxed costs.

[pbreit]

Negative contribution margin would be if your sales did not even cover your variable costs.