I was listening to a podcast yesterday that talked about how the number one thing they focused on was profitability. And guess what was the biggest driver in that? Contribution margin.
Whether you're a bootstrapped beauty brand or an established CPG company, understanding your contribution margin is crucial for making informed business decisions and fueling sustainable growth.
Let’s dig a little deeper. First, what is contribution margin?
Contribution margin is the profit you make on each product sale after subtracting the direct costs of producing and selling that item. This leftover cash fuels your operations, marketing efforts, and ultimately, your bottom line.
Let's use your popular face cream as an example:
Retail price: $45
Variable costs:
- Cost of goods manufactured (COGM): $12 (includes ingredients, packaging, direct labor at the contract manufacturer)
- Inbound shipping from manufacturer: $2
- Outbound shipping to customer: $3
Total variable costs per unit: $17
Contribution Margin: ($45 - $17) / $45 = 62.2%
Why is this so important for beauty brands?
Contribution margin allows you to:
- Profitability Insights: Using the above example, knowing your 62.2% margin on that face cream helps you understand which products are your true money-makers.
- Pricing Strategy: You can confidently set prices that maximize profits while staying competitive.
- Inventory Optimization: Focus on high-contribution products to streamline inventory and allocate marketing resources effectively.
- Acquisition Appeal: A healthy contribution margin demonstrates your brand's profitability potential, making it more attractive to potential buyers.