Metrics that Matter: My Love of Contribution Margin! (Part 2 of 2)

The definition of a good management report is that it changes behavior! It stimulates change. Putting on my 20+ years managing the CIO function, the “I” is Information! Collecting it, securing it, organizing it and distributing it. When thinking of distributing data, in the form of information (as opposed to for transactional usage), I find three components make up a great report or dashboard.:

• The information is relevant to company performance
• The data is accurate
• It is easily digestible–the presentation layer is appealing–for the entire audience

I like to start simple, and let the reported information offer new doors to open, vs. trying to capture everything at once–10 sheet massive spreadsheets make me dizzy. My favorite executive dashboard is Contribution Margin–by marketing or sales channel. If I had one view to measure the business as a first and second-level KPI dashboard, suitable for all leaders, this would be it.

What is Contribution Margin?

There are many definitions out there and I grabbed one: “Contribution margin explains how growth in sales can affect growth in profits. To calculate the margin, you subtract variable costs (like shipping expenses) from sales revenue — the remaining amount of revenue covers fixed expenses (like rent). Any revenue left after fixed expenses is profit or earnings.”

There are two versions of contribution margin reporting I am drawn to. The two most interesting to me, considering a multi-channel retailer:

• Order Economics by Selling Channel. This is a great report that can determine the profitability of each selling channel at the contribution level, but all the way down to EBITDA as many fixed costs are directly associated with a specific channel (like store labor, rent, platform costs, COS and G&A).
• Order Economics by Marketing Channel. This report analyzes the “above the fixed cost line” profit by marketing channel. The complex aspect of this report is how you attribute traffic across multiple channels. Still, if you start with the approach your company currently takes, it’s a great benchmark for both marketing efficiency and site performance by channel.

Both of these reports cover a variety of variable costs–and in the best models I have seen, actual income statement reconciliation down to EBITDA is possible–it becomes complex as many variables and fixed costs influence other selling channels, but just reporting down to contribution margin is a great starting point. If you aren’t making money at the contribution level, you certainly are not making it at the EBITDA level. So at least you can be “eyes wide open” on the effectiveness of your spend, and the site performance of your channels. 

Picture a report that has all the marketing channels down the left-hand side (e.g., social acquisition, email, paid search, SEO, YouTube, etc.) and the following items as column headers moving left to right–and yes this is prescriptive!

• Spend over a period of time for that channel 
• Traffic over that same period from that channel*
  • Mobile
  • Desktop
• Site metrics:
  • Conversion (mobile & desktop)
  • AOV (average order value)
  • UPT (units per transaction)
  • Bounce rate % (after landing on your website, the visitor’s next click is off your site)
  • Reach PDP % (product detail page, where “add to cart” resides)
  • Add to cart %
  • Abandon cart %
• Total orders from that channel
• Total revenue from that channel
• Revenue per order
• Gross margin per order
• Marketing spend of this channel by order (MCPO)
• Shipping fees per order
• Credit card fees per order
• Contribution margin per order, simple math: subtracting MCPO, shipping fees, and credit card fees per order from the gross margin per order!  BAM!

Repeat this all below in another table with the previous FY data — same time period — for a great gauge of your marketing performance, conversion by device and channel, and basic web metrics all on one page! Not all channels perform the same!

This report can be one page, showing a high-level but complete view of critical operational metrics, and can help raise the performance IQ of your enterprise–suitable for any leader regardless of function.

* Note that the rub will always be attribution. But, starting with last-click attribution (what was the LAST marketing channel the customer clicked before coming to the site) at least establishes a benchmark. Multi-touch attribution (a different post for a different day!!) can be powerful with two caveats:

• Don’t have anyone build these models if they have a dog in the fight of what marketing channels you use. For example, don’t have Meta or Google build your models!

• This is science — imperfect, but ever-improving science — so keep subjectivity out of it. Get Tech, Marketing, and Finance to all agree on what model to use, and then run with it!

Benefits of Contribution Margin

Understanding contribution margin by marketing channel, along with conversion and other site metrics, opens up several avenues to explore in more detail and enables testing and learning across several areas to improve performance.

• Almost every initiative within marketing and site experiences should see results in this report (or at least via a drill down a level deeper)
• Understanding your LTV at the contribution margin level enables an enterprise to spend marketing dollars more intelligently, more efficiently. This is my favorite–determining how many orders a particular channel needs to become profitable at the CM level.
• Another great opportunity is it provides early indicators of where to focus customer experience efforts. Landing page optimization, etc.
• Can help form decisions on discount strategies–e.g. is it better to give cheaper channels more?
• Provides a baseline to layer in and/or measure MTA–just do so prudently and with agreement from marketing, technology & finance. You can’t give a channel more w/o taking some from another!
• It promotes visibility at the order profitability level and for non-marketing and site experts, it is easily digestible.

In the next Topper Tuesday, my last in the Replatform Series, I will provide a step you can take to enhance your re-platforming efforts!

• Summarize the entire series for easy access
• My top 5 tips and tricks from the entire series
• A gratis and neutral platform assessment is available for you!
• A pending Ebook compiling the entire series

Jay Topper

Chief Customer Officer @ fabric