Operating margin is one of the three main measures of overall profitability for a company that analysts consider, whereas contribution margin is a more specific analysis of production costs for individual products, usually an internal analysis done by a company to look for ways to increase profit margins.
The Differences Between Operating Margin and Contribution Margin
There are three measures of a company's profit margin that analysts commonly review: gross profit margin, operating profit margin and net profit margin. Gross profit margin measures a company's remaining profit after direct production costs have been subtracted. Operating profit margin shows the profit margin that exists after also subtracting overhead, or operating, costs in addition to the direct production costs that are figured into the gross profit margin. Operating costs include employee salaries, cost of facilities or rental costs, and marketing and advertising costs. Net profit margin shows a company's final remaining profits after sales, including all costs included under gross profit and operating profit margin, and adding in debt interest, taxes and any additional costs not previously figured into the profit equation. Within these profit evaluations, operating costs provide a means of evaluating how efficient a company is in controlling its total expenses (excluding interest and taxes).
Contribution margin is a product-by-product analysis designed to examine the profitability of the various products a company sells. Specifically, it looks at variable costs in the production of each individual product. Variable costs refer to things such as packaging, a cost that may vary based on the number of products manufactured. Because it examines an aspect of production costs, contribution margin is more closely related to gross profit margin than to operating margin. Contribution margin is used by companies to get an accurate view of how profitable different products are. If a certain product is significantly less profitable than most of the other products the company manufactures, it can consider how it might reduce production costs for that item, or whether it should raise the price of the product in order to provide a higher profit margin.