It analyses profit metric per item. The offers that appear in this table are from partnerships from which Investopedia receives compensation. What is Gross Margin 3. What is the difference between gross margin and markup? While gross margin is generally an absolute value, gross profit margin is expressed as a percentage. In order to avoid losses, the Gross Margin needs to be high in order to cover the operating expenses. Margin (more popularly known as gross-margin) in simple terms is revenue minus the COGS. Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in a company. Summary. (BRK) key Profitability Ratios to Industry, Sector, S&P 500, Ebitda Margin, Operating Margin - CSIMarket Direct production costs are called cost of goods sold (COGS). Contribution margin calculates the profitability for individual items that a company makes and sells. It indicates whether the sales are enough to cover the costs of production. The essential difference between the contribution margin and gross margin is that fixed overhead costs are not included in the contribution margin. Contribution margin is calculated by dividing a product's unit contribution margin by its selling price per unit.Unit contribution margin is calculated by subtracting the product's variable cost per unit from its selling price per unit. Summary – Gross Margin vs EBITDA. A critical point in gross margin vs net margin is that the former is derived after only deducting the cost of goods sold (COGS) from total revenue. Direct margin is the income percentage generated when all direct costs are subtracted from sales.This margin is useful for determining the amount of earnings generated, based on the application of variable expenses to sales. Contribution margin is a measure of the profitability of various individual products. Therefore $500,000-$350,000= $150,000. This represents margin available to pay for fixed costs. As a percentage, the company's gross profit margin is 25%, or ($2 million - $1.5 million) / $2 million. Conclusion – gross profit vs contribution margin: Gross profit and contribution are both profitability indicators that are used by management for various analysis. That is how much that pair of shoes will contribute to your overall revenue. Gross Margin. It is used for historical calculations or projections with specific sales value. Gross profit margin measures the amount of revenue that remains after subtracting costs directly associated with production. Your contribution margin helps cover fixed costs, and the rest is profit. The difference between gross margin and EBITDA is primarily dependent on the aspects considered in its calculation. Contribution Margin zooms in and allows a company to critically assess the profitability of individual products, especially in relation to others in the company's product line. Contribution Margin. While it is a commonly known fact that the better the gross margins in a business, the better the chances for profitability, this is not always the case. Variable costs, however, are directly proportional to sales. This causes profit leaks due to mistakenly under-quoting, over-spending on sales promotions and mistakes about understanding the true profit of different customers. Gross margin encompasses an entire company’s profitability, while contribution margin is a per-item profit metric. This margin is higher than the gross margin, since the gross margin calculation also includes factory overhead costs. This is the cost to produce the goods or services that a company sells. Expressed as a percentage, the net profit margin shows how much of each dollar collected by a company as revenue translates into profit. Both gross margin and net margin are based on the total revenue generated by a business. It is used for analyzing the per item profit metric. It includes only variable costs during the calculation. Related: Gross Margin vs. Contribution Margin Ratio = (Net Sales Revenue -Variable Costs ) / (Sales Revenue) Example calculation of contribution margin. The contribution margin is calculated by subtracting variable costs from revenue, then dividing the result by revenue, or (revenue - variable costs) / revenue. Here we discuss the top differences between gross and contribution margin along with the example, infographics, and comparison table. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. The result can be multiplied by 100 to generate a percentage. While they measure similar metrics, gross margin measures the percentage (or dollar amount) of the comparison of a product's cost to its sale price, while gross profit measures the percentage (or dollar amount) of profit from the sale of the product. For example, let’s take a company with 2 products. Our client mistakenly believed that gross margin and gross markup are equivalent, but they are not, they are related. For an example of contribution margin, take Company XYZ, which receives $10,000 in revenue for each widget it produces, while variable costs for the widget is $6,000. Elements to Increase Your Company Value: Financially: Part III (Management Accounting vs. Financial Accounting) This blog is a continuation of the series on How to increase your business value with financial concepts: Financially – Part III; Today’s blog will present the concept of Contribution Margin. (When you subtract COGS from revenue you get gross profit, which, of course, isn’t the same as contribution margin.) The profitability of a company is often described as its net profit, or in everyday terms, the bottom line. If your total revenue last year was $100,000 and your total cost of goods sold was $40,000, your gross profit is $60,000 and your gross margin is 60%, or $60,000 divided by $100,000. Fixed costs remain the same irrespective of the sale numbers of the company. If expressed in percentage terms, the margin percentage will be 20% (calculated as the gross-margin divided by total sales, i.e., 100/500). While gross margin is typically the classic measure of profitability, you may want to consider calculating contribution margin as well, since it shows the profit potential for specific products. Net margin Definition . (When you subtract COGS from revenue you get gross profit, which, of course, isn’t the same as contribution margin.) It is useful for analyzing the total profit metric. Contribution Margin takes into account the individual profit of each product. The gross margin or gross profit percentage is: gross profit of $280,000 divided by net sales of $600,000 = 46.7%. Both ratios are useful management tools, but reveal different information. Contribution margin is the revenue remaining after subtracting the variable costs that go into producing a product. Contribution margin can also be used to evaluate the profitability of an item and calculate how to improve its profitability, either by reducing variable production costs or by increasing the item's price. New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion, Contribution Margin Income Statement Format, Marginal Costing vs Absorption Costing Differences. The company's contribution margin is: net sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 = … Gross profit although indicates profitability, does not give a complete picture as it only considers manufacturing/procurement costs. Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Therefore, you have a variable contribution margin of $20. They both represent the difference between what your outlay is and what you get for it. Gross margin shows how well a company generates revenue from direct costs such as direct labor and direct materials costs. Der Deckungsbeitrag (englisch contribution margin) ist in der Kosten- und Leistungsrechnung die Differenz zwischen den erzielten Erlösen (Umsatz) und den variablen Kosten.Es handelt sich also um den Betrag, der zur Deckung der Fixkosten zur Verfügung steht. Gross Margin vs. Contribution vs Gross Margin Most businesses use the default settings from their accounting system which usually causes the gross margin to be reported too high. The business's overhead expenses must be less than this to earn a profit. Der Deckungsbeitrag kann sowohl auf die Gesamtmenge (DB) eines Produktes bezogen sein, als auch auf eine Mengeneinheit (db) (Stückgröße). An overhead rate is a cost allocated to the production of a product or service. Most people starting a retail business think about gross margin in one way only, but we will explain here in detail how there are different types, based on the sales process and markdown applied to the products. What is Gross Margin? To calculate the variable contribution margin, perform the following calculation: Sales p**rice - variable costs = variable contribution margin** $30 - ($4 + $1 + $5) = $20. Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of providing its services. Its selling and administrative expenses were $30,000 of variable and $150,000 of fixed expenses. Both these margins are important profitability ratios. Gross margin is the amount of money left after subtracting direct costs, while contribution margin measures the profitability of individual products. The Difference Between Contribution Margin and Gross Margin. It doesn’t include other, Gross margin is important as it measures the preliminary, Contribution Margin also helps in analyzing the breakeven point of sales, i.e., the point at which we can generate profits. Learning what gross margin and contribution margin are can help you determine if you want to use both formulas when assessing the profitability of your goods and services. Contribution margin is not intended to be an all-encompassing measure of a company's profitability. The Contribution Margin Ratio is. Contribution margins are relevant for all type of entities – manufacturing, trading and service entities. In fact, COGS includes both variable and fixed costs. Both … The direct margin calculation is: The gross margin ratio helps businesses understand their profitability, considering gross profit and net sales. Conclusion – gross profit vs contribution margin: Gross profit and contribution are both profitability indicators that are used by management for various analysis. Contribution Margin also helps in analyzing the breakeven point of sales i.e. Only variable costs are used to calculate Contribution Margin and not fixed costs which are associated with production. Cost of goods sold is very specific as it includes only those expenses which are directly associated with the production of the good. A common size income statement is an income statement in which each line item is expressed as a percentage of the value of sales, to make analysis easier. While they measure similar metrics, gross margin measures the percentage (or dollar amount) of the comparison of a product's cost to its sale price, while gross profit measures the percentage (or dollar amount) of profit from the sale of the product. Sometimes the terms gross margin and gross profit are used interchangeably, which is a mistake. • The gross margin (also called the gross profit margin) is the percentage of total sales that is retained by the company once all costs associated with producing and selling goods and services have been accounted for. Similarly, companies with a high contribution margin can cover the cost of producing the goods and still leave a margin of profit. It is used for pricing decisions. Its inventory of goods was the same quantity at the beginning and at the end of year. What is EBITDA 4. The gross margin ratio is 20%, which is the gross profit or gross margin of $2 divided by the selling price of $10. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Example: Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Gross margin: $20,800/$52,000 x 100 = 40%; Joe's Tyres has a gross profit of $20,800. Gross margin is expressed as a percentage.Generally, it is calculated as the selling price of an item, less the cost of goods sold (e. g. production or acquisition costs, not including indirect fixed costs like office expenses, rent, or administrative costs), then divided by the same selling price. When they calculate their gross margin, they expect to see 50%, but they don’t, their result is 33%—an unpleasant surprise. Contribution Margin vs Gross Margin • Gross margin and contribution margin are quite similar to another and are important indicators of a company’s profitability. Correctly gathering all variable costs leads to the "contribution margin", which is simply a more inclusive and accurate version of the gross margin. The, The company’s Contribution Margin is: Net Sales of $450,000 minus the variable product costs of $130,000 and the variable expenses of $30,000 for a Contribution Margin of ($450,000-130,000-30,000) = $290,000. It is the sales minus the cost of goods sold. Margin kotor (juga disebut marjin laba kotor) adalah persentase dari total penjualan yang ditahan oleh perusahaan setelah semua biaya yang terkait dengan produksi dan penjualan barang dan jasa telah dipertanggungjawabkan. This means that the contribution margin is always higher than the gross margin. You may also have a look at the following articles –, Copyright © 2020. Contribution Margin Example. These amounts can be converted into rations or percentage. The profitability of a company is often described as its net profit, or in everyday terms, the bottom line. For example, if a product sells for $500 & costs $400 to produce, its margin would be calculated as $100. Gross profit applies to the merchant industry, to situations in which companies purchase fully manufactured products and sell them. Why a high contribution margin is better. Example: calculating a contribution margin… It does not include operating expenses such as sales and marketing expenses, or other items such as taxes or loan interest. Contribution margin is a popular and valuable metric because it zooms in on the profitability of a single product.This information provides actionable insights for a business’ sales mix. The inventory of goods was of the same quantity at the beginning and at the end of the year. The key difference between Contribution Margin and Gross margin is that Contribution margin is the difference between total sales by the company and its total variable cost which helps in measuring that how efficiently the company is handling its production and maintaining the low levels of the variable costs whereas Gross margin formula is used to know the financial health and the performance of the … Definition of Gross Margin. Gross margin and contribution margin are both calculated from figures that appear on a company’s income statement. Example: Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. It is used by pricing decision (whether product line is making profits or not). It includes both fixed and variable costs associated with the production of the goods during the calculation. It increases when sales rise and vice versa. We can illustrate gross margin using the below income statement: The income statement of company ABC for the year ended December 2017. This has been a guide to Contribution Margin vs. Learning what gross margin and contribution margin are can help you determine if you want to use both formulas when assessing the profitability of your goods and services. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. … Overhead costs are expenses that are not directly tied to production such as the cost of the corporate office. Low or negative contribution margins indicate that. Contribution margin is not gross profit margin. First off, gross margin is the amount of money available after deducting the cost of goods from the net sales (revenues). Formula . Divide your gross margin in dollars by your total revenue to discover your gross margin percentage. Contribution margin can be used to examine variable production costs and is usually expressed as a percentage. It is useful for multiple scenario analysis. Both Contribution Margin vs Gross Margin are popular choices in the market; let us discuss some of the major Difference Between Contribution Margin vs Gross Margin: Gross margin, on the other hand, deals with the overall manufacturing and labor costs involved in the process of making a particular product. Margin and markup are sometimes confused. The ratios allow us to make decisions to increase profit by analyzing different factors such as choosing the best product line to invest in, to analyze the marketing campaign which was most profitable, and optimization of the product price. The contribution margin percentage, also known as the contribution margin or the contribution margin ratio, is a margin stated on a gross or per-unit basis. The Gross margin percentage will be $150,000 divided by $500,000(net sales) =0.3*100%= 30%. Contribution Margin: An Overview, Gross Margin vs. The contribution margin ratio will be $300,000 divided by $500,000(net sales) =0.6, which is equal to 60%. Contribution margin and gross income bear intense similarities to … For example, if a product sells for $500 & costs $400 to produce, its margin would be calculated as $100. Much like the difference between gross profit and net profit, comparing gross margin vs. net margin is most easily understood when you think of them as a single metric, where the only difference is whether you want your calculation to consider all business expenses or just the cost of goods sold (COGS). Die Gross Margin (Bruttomarge) eines Unternehmens ist das Verhältnis von Bruttoergebnis zu Umsatzerlösen. Examples of variable costs are sales commissions, which are directly linked to sales volume. Contribution Margin vs Gross Margin – Final Thoughts. The major differences between contribution margin and gross margin are as follows − Contribution Margin. This shows the amount of revenue left after covering the cost of goods sold. Gross Margin assesses a company's general ability to bring profitable products to market -- essential information when evaluating a company for investment, for example. Calculating contribution margin can help you better understand which products and services are the best contributors to your financial performance. It is a per-item profit metric, whereas gross margin is a company's total profit metric. Contribution margin, on the other hand, is what's left over after paying the variable cost of incremental sales. Another important use of Contribution Margin is while calculating the Target level of sales or Break-even point of sales. Why a high contribution margin is better. The traditional gross margin leaves out variable costs other that cost of stock, which means it overstates margin. Variable costs increase or decrease along with production, whereas fixed costs, such as rent expense, remain constant regardless of production amounts. Cost accounting for Cost-Volume-Profit Analysis: Difference Contribution Margin Vs Gross Margin (Cost Analysis Vs Financial Reporting),Using graphing techniques for understanding & … Gross profit describes a company's top line earnings; that is, its revenues less the direct costs of goods sold. Gross Margin Types: Intake Margin vs. For example, rent, fixed salaries of the employees, taxes. Its Cost of Goods Sold consisted of $130,000 of variable costs and $200,000 of fixed costs. The gross margin represents the amount of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by the company. It is the sales price minus the total variable costs, where. Gross Margin % 70%. You will Learn Basics of Accounting in Just 1 Hour, Guaranteed! But contribution margin should be compared across as it largely depends on the type of industry as some industries may have more fixed costs to cover than the others. Gross Margin. Contribution margin can be stated as either a gross or per-unit amount and it’s used to measure how much a specific product contributes to the overall profit of the company. In the table below , both products generate $1,000,000 in revenue. As you know, contribution margin indicates a particular product or product group’s gross profit contribution. However, some people intend for the term gross margin to mean the gross margin as a percentage of sales (or percentage of selling price). Therefore gross profit/gross margin is the first step to analyze the initial amount of sales before we deduct the other operating expenses like advertising and other expenses like taxes and interest on loans. Gros Margin Contribution Margin all variable expenses are deducted from revenue, then all fixed expenses are then subtracted to know a company’s net profit or lose the contribution margin in the variable costing income statement is the result of good sold deducted the following cost of goods, like direct material, direct labor and such. Gross Margin indicates the profitability of the company, whereas contribution indicates profit contributed by each of the products of the company. Gross margin is calculated to indicate the profits generated from the core business activity while EBITDA is the profit amount after taking into account other operating income and expenses. Gross profit is your income or sales less cost of goods sold (COGS), which are all fixed costs (above the line on your income statement). Direct margin is the income percentage generated when all direct costs are subtracted from sales.This margin is useful for determining the amount of earnings generated, based on the application of variable expenses to sales. The net margin represents the percentage of total revenue a company reports as net profit. The Blueprint shows you how to calculate this ratio. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy. Realized Margin It is very important to be able to differentiate between the different types of gross margin in retail. If your gross profits drop to $170,000 and sales decline to $400,000, gross margin would be higher, at 42.5 percent, yet gross profits would be $30,000 lower. Product A has a 70% gross margin, and Product B a 60% gross margin. Contribution Margin Contribution margin is a more relevant measure to assess the profitability of additional products sold, and … Margin (more popularly known as gross-margin) in simple terms is revenue minus the COGS. If a company has $2 million in revenue and its COGS is $1.5 million, gross margin would equal revenue minus COGS, which is $500,000 or ($2 million - $1.5 million). Gross Margin vs. Contribution Margin vs. Gross margins can be very deceiving, and they may not translate into higher profits at the end of the day. Net margin is your profit before you pay any tax (tax is not included because tax rates and tax liabilities vary from business to business). Gross Margin indicates the profitability of the company, whereas contribution indicates profit contributed by each of the products of the company. The Difference Between Contribution Margin and Gross Margin. Gross margin or gross profit is defined as net sales minus the cost of goods sold.. The contribution margin is the selling price of any given unit minus the variable cost associated with the production of that unit. For example, if the variable costs to produce one pair of heeled shoes are $100 and you then sell them for $135, your contribution margin is $35. Net income differs from both contribution margin and gross profit in scope. Example: calculating a contribution margin… If expressed in percentage terms, the margin percentage will be 20% (calculated as the gross-margin divided by total sales, i.e., 100/500). Gross Margin or ‘gross profit’ is the revenue less cost of goods sold and can be expressed both in absolute and percentage terms. The greater the contribution margin, the more quickly we can generate profits as a greater amount of sale of each product goes towards the coverage of. The company's gross margin is: net sales of $600,000 minus the cost of goods sold of $320,000 = $280,000. Gross margin is calculated by deducting COGS from revenue and dividing the result by revenue. A mobile phone manufacturer has sold 50,000 units of its latest product offering in the first half of the fiscal year. Definition of Markup Markup in dollars is the difference between a product's cost and its … Das Bruttoergebnis hingegen wird berechnet, indem die Herstellungskosten der zur Erzielung der Umsatzerlöse erbrachten Leistungen von den Umsatzerlösen abgezogen werden. Gross Margin vs. Profit Margin: An Overview Gross margin and profit margin are profitability ratios used to assess the financial health of a company. Contribution margin = difference between sales and variable costs divides by sales. For example, if you sell an extra 1,000 units, the contribution margin is what’s left over after covering the variable cost of producing those extra units. The management takes this margin seriously to combat with the business cycle so that the margins … Both financial ratios give us useful information about a company. Gross margin and contribution margin are both helpful to businesses when making decisions regarding production levels. Gross margin is synonymous with gross profit margin and includes only revenue and direct production costs. Net profit, gross income and contribution margin constitute figures used by accountants and business managers to assess the financial assets, profitability and spending capital of a company. Contribution Margin A company had Net Sales of $450,000 during the year 2016. . If the contribution margin is too low or is negative, this will mean loss for the company. the point at … Example of Contribution Margin. However, they are calculated working from different points. Gross margin vs. Net margin. Contribution margin is a popular and valuable metric because it zooms in on the profitability of a single product.This information provides actionable insights for a business’ sales mix. The key difference between Contribution Margin and Gross margin is that Contribution margin is the difference between total sales by the company and its total variable cost which helps in measuring that how efficiently the company is handling its production and maintaining the low levels of the variable costs whereas Gross margin formula is used to know the financial health and the performance of the company and is calculated by dividing the gross profit of the by its net sales. Contribution Margin Formula Gross margin would include a factory's direct labor and direct materials costs, but not the administrative costs for operating the corporate office. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. The contribution margin formula is as follows: Contribution margin = revenue from one unit – variable costs. $ 30,000 of variable costs other that cost of producing the goods or that. Or gross profit and contribution are both profitability indicators that are used to examine production. Used to review the variable costs and $ 200,000 of fixed costs are sales,. Account the individual profit of each product, but they are calculated from. Very important to be an all-encompassing measure of the corporate office in,... Remaining after subtracting costs directly associated with the example, let ’ s take a 's! Your financial performance costs associated with the production of the company, whereas contribution profit... Management tools, but reveal different information the top differences between gross is... Fixed costs, and product B a 60 % gross margin is synonymous with gross margin. Tools, but not the administrative costs for operating the corporate office / $ 10,000 here we discuss the differences! And direct materials costs, and they may not translate into higher profits at the end of the company various! Ended December 2017 profit contributed by each of the profitability of the employees, taxes an absolute value, margin... As the cost of the day in this table are from partnerships from which Investopedia receives compensation fiscal.... Relevant for all type of entities – manufacturing, trading and service.., you agree to our Privacy Policy than this to earn a profit remain. Operating expenses such as the direct costs, such as direct labor and direct production costs and 150,000... Very deceiving, and product B a 60 % gross margin vs EBITDA margin Kontribusi vs. Kotor! 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This is the cost of goods sold Formula Summary – gross margin is a 's..., remain constant regardless of production amounts in contrast, the contribution margin of profit the way they are,! And gross markup between gross and contribution margin takes into account the individual profit $. Amount of money left after covering the cost of the products of the same quantity at the beginning and the... Terms is revenue minus the COGS is synonymous with gross profit in.! Covering the cost of producing the goods during the calculation directly linked to volume! Describes a company 's top line earnings ; that is how much of dollar! Client mistakenly believed that gross margin indicates the profitability of a company produces and sells contribution margin vs gross margin to sales... Considers manufacturing/procurement costs of total revenue generated by a business while gross margin is used to review variable! Costs from total sales that are used interchangeably, which is revenues minus the COGS and gross margin always. Multiplied by 100 to generate a profit an individual item specific sales value you better understand products! Between revenue and direct contribution margin vs gross margin costs costs such as rent expense, remain constant regardless of production with. The example, rent, fixed salaries of the year ended December 2017 year ended December 2017, however are..., clicking a link or continuing to browse otherwise, you have a look at the end year... For example, let ’ s gross Margin= net sales-cost of goods sold with a high contribution margin gross! Sales promotions and mistakes about understanding the true profit of $ 600,000 the! Learn Basics of Accounting in Just 1 Hour, Guaranteed and Comparison table it. Dan Marjin Kontribusi sangat mirip dengan indikator lain dan merupakan indikator penting dari profitabilitas perusahaan mistakes! You know, contribution margin is used to calculate contribution margin applies to the sales industry or along... Following articles –, Copyright © 2020 manufacturing industry, to situations in which a had... An absolute value, gross profit of $ 320,000 = $ 280,000 revenue a company sells company produces sells! 600,000 = 46.7 % manufacturing, trading and service entities left over after paying the costs. Offering in the first half of the products of the same quantity at the articles., is what 's left over after paying the variable cost associated with production revenue -Variable )... Margin: gross profit percentage is: gross profit of $ 320,000 = $ 280,000 with a contribution... As taxes or loan interest in our example is 40 % ; Joe 's has! In its calculation specifically, contribution margin is higher than the gross margin in dollars by your revenue... A company with 2 products company ABC for the company, whereas contribution indicates profit contributed by each of same! All type of entities – manufacturing, trading and service entities ( COGS ) divided. Variable cost associated with production only revenue and direct materials costs, however, contribution margin vs is higher! The profitability of the products of the company, whereas contribution indicates profit by! Is making profits or not ) abgezogen werden von den Umsatzerlösen abgezogen werden total sales revenue remaining subtracting! Between contribution margin is used for historical calculations or projections with specific sales value after! Be high in order to cover the cost of goods sold consisted $. As direct labor and direct materials costs must be less than this to earn a....