Ensuring that you have the best e-commerce financial planning is crucial and it can indeed make a major difference for your business. The truth is that you get to assess profitability, figure out what you can improve upon, and how you can better adjust everything. It’s not a walk in the park to understand the benefit of having a good contribution margin. And a lot of the time, it comes down to integrating the right solutions and constantly adapting. But it will be worth the effort.
What is the contribution margin, and why does it matter?
When you hear about the contribution margin, you might overlook that info. But the truth is that it can help you quite a lot. The contribution margin shows the revenue that you have after variable costs are out of the way. Basically, you can have a good understanding of per-unit profit and you can see it as the gross figure, something to take into account.
How it differs from gross and net profit margins?
Obviously, the contribution margin is more about the per-item profit rather than total profit. It does help because you can see what individual profits you can expect. While that affects the total gross, you can also see where you can increase prices to boost profitability. It’s definitely important to study the contribution margin and use that info to help your business.
How contribution margin helps in pricing decisions?
The contribution margin gets calculated by subtracting variable costs from the selling price. Why is it important? You can see the profit you get per unit. If the profit margin is lower than you might normally expect, then you will end up increasing the price. Needless to say, the contribution margin offers a lot of info that you can use to boost profits.
How to calculate contribution margin?
The important thing you have to know is what you need to calculate the contribution margin. In this case, you want to know the sales revenue, but also variable costs. Knowing fixed costs and the net income is also important. Variable costs can be different for each business. But in general, you want to know raw material cost, employee wages, utility costs, sales commissions, maintenance costs and so on.
The formula for computing contribution margin
The formula you can use to calculate any contribution margin is “Sales Revenue – Variable Costs”. However, there can be certain variations to consider here, for example the contribution margin can also be determined via adding up the net income to fixed costs. Or, if you want to know the contribution margin per unit, you can withdraw the variable cost per unit from the total price of each unit.
How to analyze contribution margin to optimize profits?
Simply by subtracting the variable cost per unit from the unit selling price you will know the contribution margin. And that will help you figure out if the price per unit offers enough profit or not. Sometimes it doesn’t, in which case the solution is to increase item pricing. That’s a great idea and it could help eliminate many potential challenges.
Improving contribution margin for better financial performance
Every e-commerce business wants more profits, and studying the contribution margin can help you achieve that. It will help you focus more on success and growth, while allowing you to expand and generate more profits. But you have to narrow down where you need to increase costs, and what other approaches you can take to boost profits.
Reducing variable costs to increase margins
A great way to increase margins is to reduce variable costs. Once you study the contribution margin, you may find various ways to lower those variable costs. After you do that, it will become much easier to increase margins, and the ROI can be extremely good.
Using ProfitBlue for automated contribution margin tracking
If you’re looking for an effective way to automatically track contribution margins for your e-commerce store, then look no further. ProfitBlue is extremely powerful and it can offer you all the insight you need when trying to narrow down the right contribution margin. There are challenges when it comes to understanding the contribution margin and figuring out how you can increase it. But ProfitBlue gives access to the necessary data, and it will help streamline your process in better ways than expected.
Closing thoughts
It’s always very helpful to have access to the contribution margin data and stats. That will tell you how much of a profit you’re making per product, and what ROI you will receive from it. The more you understand about per-item profit, the easier it will be to see whether you need to increase prices or not. Needless to say, knowing the contribution margin can be extremely helpful, so it’s certainly one of the most important metrics you have to focus on!
