Maybe you’ve heard the old saying: “Our sales volume goes up, but why don’t we make a profit?”. The main cause is most likely the ineffectiveness of the business’s marketing strategy and efforts. A business or company that experiences such a thing may not knowingly invest its money in a wasted marketing effort. But more to their ignorance of how to take advantage of effective marketing efforts. One way for your business marketing strategy or effort to be effective is to take advantage of the Contribution Margin.
Not only as a Financial Statement Analysis tool but the Contribution Margin concept can also be effectively used in business marketing strategies. By utilizing the Contribution Margin concept appropriately, you can be sure that this adage will not be experienced by your business.
Overview of Contribution Margin
The contribution Margin is the difference between the revenue you generate from sales and the variable costs of your business. And the difference is used as an indicator of your business’s ability to cover fixed costs.
Fixed costs are costs that the company pays to stay alive even if your company is carrying out production activities or not. While variable costs are costs that change depending on how much you sell your product. In particular, marketing costs can be included in the category of variable costs.
Contribution margin equals total revenue minus variable costs. So, if you made $5000 on sales and spent $1000 on variable costs to make it happen, your Contribution Margin would be $4,000.
This article focuses on how you can streamline your marketing costs, which include variable costs. Because marketing efficiency can be a determining factor in whether your company is in a “green” or “red” state.
How to Increase Your Business Contribution Margin?
Regarding the previous explanation, it is clear that a high Contribution Margin is a key to the success of marketing strategies and efforts. But how can you improve it?
The key is to identify which aspects are contributing and which are not in your business marketing strategy and efforts. Get rid of things that don’t contribute to your marketing strategy. And your Contribution Margin will increase.
For example, you are running an SEO (Search Engine Optimization ) marketing strategy. And you may be wasting 76% of your budget to produce articles with keywords that will not lead to your business sales.
Simply cut a percentage of your budget towards an SEO strategy and redirect articles created with more effective keywords. Then you can dramatically increase your Contribution Margin without increasing your marketing spend.
Once you know how to increase your marketing Contribution Margin to 5x or better, your marketing efforts will become the “growth engine” for your company.
While not every business can achieve great results, achieving a Contribution Margin of 5x makes sense for most marketing efforts. You only need time, effort, and precision.
There are many more ways to calculate Contribution Margin related to your marketing strategy and efforts. In this article, we only provide an overview and basic knowledge of how vital the Contribution Margin value is to a business marketing strategy. And finding the Contribution Margin value takes extra time and effort. But if you can do it, you can break the adage mentioned at the beginning of this article. And you will take your company or business to an amazing development.