![]() Contribution margins and gross profit margins allow you to make data-driven decisions to increase profitability by optimizing pricing, analyzing products, services, customers and individual jobs and adjusting your payment or employee incentive structure. It is also represented as amounts, ratios or percentages reveal key information regarding the structure of sales, pricing and commission calculating processes. It’ s called “contribution” margin, because this is the amount that “contributes” to paying for overhead or making a profit. You would not have the commission if you didn’t sell the job, so it’s a true variable expense, but it’ s not a cost of earning the income.Ĭontribution margins represent the revenue that contributes to your profits after your company reaches its break-even point (the point at which sales become profitable after meeting fixed costs). Variable indirect costs are the costs that are related to that customer or job, but were not “directly” related to earning that income. Your Contribution Margin (CM) is the revenue left over after paying all the variable costs – both direct a nd indirect. It’ s best shown in both dollars and percent ( Gross Profit/Revenue). ![]() ![]() COGS is the “direct” cost of the labor and material you had to incur to generate that revenue. Gross Profit (GP) is the amount of money leftover from the revenue you earn, less the Cost of Goods S old (COGS). Gross Profit Margin VS Contribution Margin If you have visibility into what causes profits, you can add fields based on the decisions you need to make to drive more profits. That allows you to make data- driven decisions around where to focus your sales people, the behaviors you recruit for, and where to invest your marketing efforts. If you can see which clients are the most profitable, then you can tag each client in your accounting system to see which industries generate the most profits, which sales people bring in the highest margin jobs and even which staff or marketing campaigns generate the most profits. This is important because once you understand unit economics you can study the past to improve the future. Why? Because this is how you get to “unit economics” – the relationship between revenue and the cost to generate that revenue. If you want to increase profits, the single biggest way is to study your gross profit margin and contribution margin. In spite of Knight's warnings, if you learn to grasp the concept of contribution margins, gross profit margins, contribution margin ratios and what these numbers mean for your business, you will have the keys to unlock profitability and exceed your business’s potential. a term that can be interpreted and used in many ways," said Joe Knight, co-founder of in an interview with Harvard Business Review. "Contribution margin is a common financial analysis tool that’s not very well understood by managers.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |