Pricing for Profit: costs, margins and tiers

01

Variable costs, fixed costs and contribution margin

In simple words

Some costs go up with every cookie you bake (flour, a box). Some costs stay the same even if you bake no cookies (the oven rental). To see if one more cookie helps you, count only the costs that come with that one cookie.

Before this course: Pricing Your Product or Service (course 2.4). You should already know true cost, markup vs margin, and the basic pricing rules (course 2.4 uses Canadian examples; see In your country in Lesson 4). If not, do course 2.4 first. We build on its candle example.

Key facts

Variable cost: changes with each sale (materials, packaging, payment fee, shipping you pay, labour you pay per item).
Fixed cost: stays the same each month regardless of sales (software, phone, insurance, rent).
Contribution margin (CM) per sale = price - variable cost. It is the amount one sale adds toward fixed costs and then profit.
CM ratio = CM / price x 100.
Payment fees are variable. Example (Canada): Stripe's standard rate for domestic Canadian cards is 2.9% + CA$0.30 per successful transaction. Fees differ by country and provider, so check the current pricing page for yours before you rely on it.

Example (the candle from course 2.4, price $25)

Variable cost	Amount
Wax, wick, scent, jar	$4.50
Label and box	$1.00
Payment fee (2.9% x $25 + $0.30)	$1.03
Labour (15 min at $20/hour)	$5.00
Variable cost	$11.53

CM = $25.00 - $11.53 = $13.47. CM ratio = 13.47 / 25 = 53.9%. The $100 a month in fixed costs is not in this number.

Step by step

Pick one product or service and write its price.
List every cost that happens each time you sell one. Add them up.
Subtract from the price. This is your CM per sale.
Divide the CM by the price and multiply by 100 for the CM ratio.
List your fixed monthly costs separately and add them up.
Check: your CM is smaller than your price and your fixed costs are not mixed into it.

Watch on YouTube

How to calculate break-even points, contribution margin and target quantityLearn Something · YouTube · youtube.com

Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.

LESSON 01Variable costs, fixed costs and contribution margin

LESSON 01 / ANIMATED LESSON / AI VOICE00:00 / 01:00

Voice

Read the video script

[Host] "Does one more sale actually help you? Count only what that sale costs."
[Text on screen: Variable = changes per sale / Fixed = same every month] "Variable costs come with each sale. Fixed costs stay the same."
[Text on screen: CM = price - variable cost] "Price minus variable cost is your contribution margin."
[Text on screen: $25 - $11.53 = $13.47] "On a $25 candle, that is $13.47 toward your fixed costs and profit."
[Host] "Know this number for everything you sell."

Try it now

Make a table like the candle one for your main product. Write the CM in dollars and the CM ratio. Then write your total fixed costs for one month.

ClaudeStuck? Copy a ready-made prompt for Claude

Copy this, open Claude, paste it, and Claude will walk you through the lesson step by step.

For a grown-up: Claude is for adults (18+). Copy this, paste it into Claude, and use the answer to explain the lesson to your child.

I'm learning "Pricing for Profit: costs, margins and tiers" on The Future Market. Lesson 1: "Variable costs, fixed costs and contribution margin".

What the lesson teaches:
- Variable cost: changes with each sale (materials, packaging, payment fee, shipping you pay, labour you pay per item).
- Fixed cost: stays the same each month regardless of sales (software, phone, insurance, rent).
- Contribution margin (CM) per sale = price - variable cost. It is the amount one sale adds toward fixed costs and then profit.
- CM ratio = CM / price x 100.
- Payment fees are variable. Example (Canada): Stripe's standard rate for domestic Canadian cards is 2.9% + CA$0.30 per successful transaction. Fees differ by country and provider, so check the current pricing page for yours before you rely on it.

The exercise I'm working on:
Make a table like the candle one for your main product. Write the CM in dollars and the CM ratio. Then write your total fixed costs for one month.

I'm stuck. Please:
1. Explain the main idea in plain, simple words with one everyday example.
2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step.
3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.

I'm a parent helping my child (about 8 years old) with a lesson called "Variable costs, fixed costs and contribution margin" from the course "Pricing for Profit: costs, margins and tiers".

Here's what the lesson says:
Some costs go up with every cookie you bake (flour, a box). Some costs stay the same even if you bake no cookies (the oven rental). To see if one more cookie helps you, count only the costs that come with that one cookie.

The activity:
Make a table like the candle one for your main product. Write the CM in dollars and the CM ratio. Then write your total fixed costs for one month.

Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words.
Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.

Open Claude

Sources

Stripe Canada pricing: stripe.com/en-ca/pricing

My notes

I learned this

02