Definition
Contribution margin
Contribution margin is a menu item's price minus its variable cost, the dollar amount each sale contributes toward covering fixed costs and, once those are covered, profit.
Contribution margin is what is left from an item's price after you subtract the costs that exist only because you sold it: the ingredients (Cost of goods sold (COGS)) and any variable cost tied to that plate. A $16 pasta with $4 of food cost has a contribution margin of $12. That $12 is not profit, it is what the sale hands you to help pay down rent, insurance, and the rest of your fixed costs, and only sales beyond your Break-even point turn into actual margin.
Contribution margin, not Food cost percentage alone, is what should drive Menu engineering. A dish with a scary-looking 40 percent food cost can contribute more dollars than a 25 percent dish that sells for a fraction of the price, and dollars are what pay the bills. Ranking the menu by contribution margin and by how often each item actually sells tells you which plates to feature, reprice, or cut, which is the real lever on a 3-5% net margin business.
Menu-analysis tools cross item cost from your invoices with sales mix from the POS to rank every dish by contribution and popularity, so you promote the profitable sellers instead of guessing, and ordering systems steer guests toward them. See menu optimization.
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