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Pricing - Contribution pricing


Contribution pricing is very similar to marginal cost pricing. The direct cost of production for each product is calculated and price is then set at a higher level. The difference between the direct costs per unit and the price is called the contribution, so called because this is NOT PROFIT, but a 'contribution' to the unpaid indirect/fixed costs of production.

No one product will need to account for all the indirect costs, but each product sold will contribute a proportion to the payment of the firm's overall fixed costs.


For example, let's assume that Maze Green Yachts has indirect/fixed costs of $200 000 and faces the following situation:

Product Sales Direct costs per unit ($) Price ($) Contribution per unit ($) Total contribution ($)
21i 17 28 000 29 000 1 000 17 000
25i 18 33 000 36 000 3 000 54 000
32i 15 43 000 48 000 5 000 75 000
38i 11 62 000 66 000 4 000 44 000
45i * 11 80 000 88 000 8 000 88 000
Total contribution $278 000

* Note that the product number refers to the size of the yacht, so the larger the number, the larger the product.

Have a careful look at this data. Why do you think the contribution from each product is different? What factors might lead to these differences? Have a think about these issues and then follow the link below.

Maze Green Yachts - contribution pricing strategy

Since the indirect/fixed costs are only $200 000, Maze Green's contribution will cover these and leave a net profit of $78 000.

Advantages and disadvantages of contribution pricing


  • Contribution pricing allows flexibility in the pricing of individual products - low volume or successful products can be priced to give a higher contribution to indirect costs
  • Demand factors can be taken into account with contribution pricing
  • Pricing can be linked with the nature/position of the product (N.B. Consider the link with product life cycle and the Boston Matrix - newly introduced products could even be priced with a negative contribution to boost demand and push them into their growth phase while cash cows could command a higher contribution)


  • It may be difficult to allocate costs accurately or appropriately across the full product range and so difficult to assess the most appropriate contribution.
  • If costs are difficult to allocate then this may lead to the pricing being inaccurate
  • It may lead to an excessively product and cost-oriented approach and so not be sufficiently flexible to customer needs.