Welcome to the era where margin and profit are king, not growth at any cost.

To scale your marketing budget you need to get comfortable with financial analysis and make decisions that balance creativity, financial metrics, and effectiveness.

One of the few metrics your executive staff use to determine your marketing budget, contribution margin.

Here is why it matters, how you calculate it and what you can do to improve it. 

Why Contribution Margin Matters

How we make money and how we report it, is not the same thing.

In a gross oversimplification, we make money when our revenues exceed our costs.  

However costs are more complicated to calculate and many times do not match how you may view the economics of a campaign. 

Meaning the way you view a campaigns success will be different than how it is reported on an Income Statement, where contribution margin is calculated.  These financial statements are used to communicate the health of a company to investors, owners, regulators, and other stakeholders.

You want to know how what you do affects these financial statements. Once you understand the inputs driving your company’s contribution margin, you can make decisions on what products are driving profit and which products to promote with a financial acumen that speaks to the higher ups.  

How to Calculate Contribution Margin

Contribution Margin = Revenue - Variable Cost

Revenue = Total dollar value of the goods or services sold

Variable Costs = Examples include; Ad spend, Discounts, Cost of Goods Sold / Order, Return Rate, Shipping & Fulfillment Costs, Commissions,

Example

Skincare Brand

• Average Order Value: $100
• Cost of Goods/Order: $20
• Return Rate: 25%, or an average of $25/order
• Shipping & Fulfillment Costs: $10
• Variable eCom Costs: $5

Profit of $40 on a $100 order before ad costs are factored in.

Men's Shaving Line

• Average Order Value: $100
• Cost of Goods/Order: $15
• Return Rate: 10%, or an average of $10/order
• Shipping & Fulfillment Costs: $10
• Variable eCom Costs: $5

Profit of $60 on a $100 order before ad costs are factored in. 

Once you understand the inputs driving your brand’s contribution margin, you can make your marketing more efficient by being strategic about what products you promote.

What you can do to improve your Contribution Margin

1. Increase Customer Retention and/or Lifetime Value
2. Get Creative With Reducing Expenses
3. Consider Price Changes
4. Increase Sales

If you want to increase your marketing budget, think like your executive staff by acting based on financial information that includes more than advertising costs.

Sources

• Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean
• How to Optimize Your Business’ Contribution Margin Ratio
• Marketing Finance 101: How to dissect your brand’s financial statement
• 💰 3 Finance Concepts That Will Make You A Better Marketer By
• Financial Analysis for Marketers