Are You Tracking Contribution Margin? You Should Be.
Measuring the right metrics regularly can help you stay on top of your business's health and make informed decisions, but there are a lot of metrics sellers can track. Today, we're focusing on Contribution Margin, which is a great way to gauge the ceiling of your profit margin and the health of each of your revenue streams.
(If you're looking for a faster, less manual way to manage all your KPIs, check out the new beta we just rolled out called Ecomm HQ. Only open to a limited number of sellers, it aggregates your Amazon and Shopify data in one easy-to-consume dashboard. Apply to join the beta for exclusive access!)
Revenue
Let's start with revenue. Revenue is generated through different channels, and in an ideal world, your direct, organic, email, and SMS channels would drive the majority of your revenue. The customer acquisition cost for those channels is significantly lower than paid and social channels, but it's more difficult to scale and maintain these channels. With paid channels, you can scale quickly and precisely with additional marketing dollars. So your revenue makeup will likely include dollars from both organic and paid channels. (As a bonus, organic channels also often see a lift from increased traffic across ad-attributed channels.)
Contribution Margin
Contribution Margin is calculated by dividing your contribution profit by your revenue. It's an easy way for you to see just how much revenue you're actually keeping as profit.
Not only is this a helpful KPI for your overall business, it's also valuable when calculated at the revenue stream level. Each sales channel will have a different contribution margin, and tracking this will help inform how you should invest your dollars and resources.
For example, the contribution margin on D2C channels is generally higher than the contribution margin on Amazon (because of the selling costs for listing on the marketplace), so a dollar of DTC revenue is worth more than a dollar of Amazon revenue. If you know this, you'll know you should watch for your Amazon sales potentially cannibalizing your DTC sales. You'll also know that you can spend more money to acquire a new DTC customer than on Amazon while still maintaining profitability.
(There are exceptions to this statement. Some DTC brands spend more than 15% of sales on advertising, and their cost to fulfill is almost always higher because it's tough to compete on price with Amazon FBA and fulfillment and storage services. It often comes down to how competitive the space is on Amazon and the portion of revenue the brand is spending on Amazon ads. That's why it's so important that you track and monitor your contribution margin regularly!)
If you're not sure how to calculate contribution margin, check out our infographic below. If you're interested in checking out Stoke's new Ecomm HQ dashboard to streamline your reporting and measurement, apply to the early beta here!
