definition of "Contacts" in Marketo

'People' is a new name for what used to be 'Leads' - It's updating gradually across all Marketo Instances.

For Marketo, there's no concept of Contacts - Marketo calls everyone as 'People' - the record can be a Lead or a Contact on SFDC side.

Therefore, regardless of whether the 'Person' in Marketo, is a 'Lead' or 'Contact' in SFDC - the Person is a Person/Lead in Marketo.

As per Marketo Glossary - In Marketo Engage, lead is the previous term (replaced by person) used to describe an individual in your Marketo database that you're engaging with through your marketing campaigns. In your CRM, a lead may represent a different concept (i.e., an individual associated with an opportunity) independent of Marketo's functionality. 

Hope this helps!

Marketo - in terms of contracting calls people "contact records" 
but in terms of everything else - they are people. If your database is synced to Salesforce you are able to see if the record is a lead or contact on the "Lead Info" tab of a record. 

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Also, when do I start paying for a contact in Marketo?

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Any record on the known side of your database counts against your subscription limit. Note a known record need not have an email address, nor do any other fields need to be non-empty. The only important thing is that it's not anonymous.

Anonymous records, which are created by someone browsing your site with Munchkin enabled but without any "identifying marks" (clicking a Marketo-tracked email, filling out a Marketo form) aren't counted.

Just wanted to add that the field "SFDC Type" tells you if a Marketo person is a Salesforce Lead or Contact.