By Juan Carlos Valda – jcvalda@grandespymes.com.ar
In many SMEs, sales are high but profits are low. The business owner works nonstop, the sales team pushes hard, revenue grows… and yet profitability never appears or quickly fades away. In those situations, there is almost always a missing or misunderstood concept: marginal contribution.
This is not an accounting technicality or a tool reserved for large corporations. It is probably one of the most powerful numbers for running an SME with real judgment. The problem is that when it is unknown or poorly used, the company makes decisions blindly, believing it is moving forward when in fact it is digging its own hole. 
The cultural mistake: believing that every sale adds value
One of the most common mistakes in SMEs is assuming that every sale is good by definition. “As long as we invoice, we’ll figure it out later.” That logic may work for a while, but sooner or later it comes at a cost. Because not all sales contribute equally—and some actually destroy value.
Marginal contribution answers a simple and brutal question: how much does each product, service, or client really contribute to covering fixed costs and generating profit? If that answer is unclear, the company is not managing—it is reacting.
What marginal contribution is and why it matters so much
Marginal contribution is the difference between the selling price and the variable costs associated with that sale. It is what remains available to cover fixed costs and, only after that, generate profit. It does not speak about historical accounting; it speaks about present and future decisions.
When an SME understands its marginal contribution, discussions stop being abstract. The company begins to understand what sells well, what sells poorly, and what needs to be reconsidered. Without this number, everything gets mixed together: profitable products with problematic ones, strategic clients with toxic ones, volume with profitability.
The direct impact on commercial decisions
An entrepreneur who does not know their marginal contribution often makes poor commercial decisions, even with the best intentions. Excessive discounts just to “close the deal,” poorly designed promotions, prices set based on competitors instead of the company’s own cost structure.
When marginal contribution is low or negative, selling more actually makes things worse. This is hard to accept because it goes against commercial instinct. But it is a harsh reality: more sales do not always mean better results.
Marginal contribution is not about stopping sales—it is about selling better. It is about choosing where to focus commercial effort and where not to.
Marginal contribution and product mix
Another key strategic use is analyzing marginal contribution by product or product line. Many SMEs discover that a large portion of their revenue comes from products that contribute little or nothing, while others—less visible—are the ones that truly support the entire structure.
When this analysis is not done, the company tends to invest time, energy, and resources in what sells the most, not in what contributes the most. The result is enormous effort with limited return.
Managing with marginal contribution means setting priorities: protecting the products that sustain the company, reviewing those that drag it down, and consciously deciding the role each one plays.
The link between marginal contribution and installed capacity
Marginal contribution is also essential for deciding how to use installed capacity. During slow periods, many SMEs accept jobs with minimal margins “just to keep running.” The problem is not using capacity—it is not knowing at what cost.
If marginal contribution is positive and helps cover fixed costs, it may make sense. If it is negative, every unit produced makes the problem bigger. Without this analysis, the company confuses activity with progress.
Profitable clients and expensive clients
Marginal contribution is not limited to products. It can also be analyzed by client. Two clients buying the same product can generate very different results if one demands constant discounts, long payment terms, special deliveries, and continuous attention.
Many SMEs maintain exhausting commercial relationships out of fear of losing volume, without realizing that those clients consume resources and energy disproportionately. Measuring marginal contribution by client allows for uncomfortable—but healthy—decisions.
Not all clients are worth the same. And not all deserve the same conditions.
Marginal contribution and pricing: deciding with data, not fear
One of the greatest benefits of this concept is that it brings rationality back into pricing decisions. When an entrepreneur knows their marginal contribution, prices stop being set by intuition, imitation, or fear. They begin to understand how far they can negotiate—and where they cannot.
This does not mean rigidity; it means awareness. A discount can be strategic if its impact is understood. Without that knowledge, every concession is a blind bet.
The mistake of looking only at gross margin
Many SMEs believe that looking at gross margin is enough. It is not. Gross margin does not distinguish between variable and fixed costs, which leads to misleading interpretations. Marginal contribution, on the other hand, is designed to support decisions, not just to inform.
When these concepts are confused, companies often believe they are “doing fine” when in reality they are barely holding things together.
How to use marginal contribution strategically in an SME
Using this indicator strategically means bringing it into key conversations. You do not need a complex system. It is enough to calculate it for your main products or services and review it periodically.
From there, smarter decisions can be made: redefining prices, redesigning promotions, adjusting sales commissions, discontinuing problematic lines, or strengthening those that truly support the business.
Marginal contribution also helps simulate scenarios: what happens if prices increase, if the mix changes, if a client is lost, or if a new one is gained. Managing stops being guesswork.
How can you apply this in your SME?
Start by calculating the marginal contribution of your main products or services. Do not aim for surgical precision—aim for conceptual clarity. Separate variable costs from fixed costs and look at the numbers honestly.
Then use that information to decide, not to archive. Review where you focus commercial effort, who receives discounts, and why. Ask yourself what would happen if you sold less of what does not contribute and more of what does.
Knowing marginal contribution does not make you cold or overly analytical. It makes you responsible. Because an SME is not managed with good intentions—it is managed with information that allows you to choose well.
Selling is important. Collecting is vital. But understanding how much each sale truly contributes is what ultimately separates companies that merely survive from those that build profitability, predictability, and a future.
