Margin Contribution

Struggling to make sense of your numbers? Let’s cut through the confusion! Understanding margin contribution is the key to turning hard work into real profit.

Let's talk about margin contribution for a hot minute. Flashback to 1990, when I opened my first salon & spa and cranked out 125,000 bath bombs. I worked like a dog, and come tax time, I couldn't understand why I was flat broke.

Here's the deal: It all comes down to margin contribution. If you're scratching your head right now, stop what you're doing and learn this term. It’s the difference between turning a profit and going broke.

I see a lot of you hustling on bath bombs, lip balms, and other small-ticket items. I've been in this field a long time, and while I do stock these goodies, they are a volume play. I'm talking 10,000 units a month kind of volume.

Let me break it down with some numbers. Say your margin contribution is $2 per bath bomb. Sell 100 of those, and you're adding a whopping $200 to your bottom line. That's right, just $200 for all that effort. Can you live off that? Didn't think so.

Selling $10 items isn't sustainable if you’re not moving thousands of them. I’m not here to discourage you, but I do want to save you from the painful realization that working hard doesn’t always mean making bank. Learn your numbers, know your margin contribution, and don't sell yourself short—literally!

Tip #1 - Know Your Costs Inside Out

Break down every single cost associated with your product, from raw materials to labor, shipping, and even your time. Understanding these details ensures you accurately calculate your margin contribution. Don’t overlook the small expenses—they add up quickly and can eat into your profits if not accounted for.

Tip #2 - Set Clear Profitability Goals

Define your profitability goals before setting your prices. Think about what you need to cover your fixed and variable costs, and then some. Your margin contribution should align with these goals, ensuring each product sold brings you closer to financial stability and growth.

"Master Your Margins, Master Your Profits."

Tip #3 - Focus on High-Margin Products

Not all products contribute equally to your bottom line. Identify which items have the highest margin contribution and focus your efforts on promoting and selling those. This can help balance out lower-margin items and boost your overall profitability.

Tip #4 - Regularly Review & Adjust

Costs can change over time, affecting your margin contribution. Make it a habit to review your costs and pricing regularly. Adjust accordingly to maintain or improve your margin contribution, ensuring you’re not just covering costs but also achieving your desired profit margins.

Tip #5 - Consider the Volume Play

Some products, like bath bombs or lip balms, may require high sales volumes to be profitable due to their lower margin contributions. If you’re selling lower-margin items, ensure you have the capacity to scale and sell in large quantities to make the effort worthwhile. Otherwise, consider whether it's worth the investment of your time and resources.

FIGURE OUT YOUR MARGIN contribution cost

To figure out your margin contribution cost, follow these steps:

1. Calculate Your Selling Price Per Unit

Start with the price at which you sell your product. This is the amount your customers pay for one unit of your product.

2. Identify All Variable Costs Per Unit

Variable costs are those that fluctuate with production volume. These include:

• Cost of Goods Sold (COGS): Raw materials, ingredients, packaging, etc.

• Labor Costs: Time spent by you or your team to produce each unit.

• Shipping Costs: Cost to receive raw materials and to ship the finished product to customers.

• Other Costs: Fees related to payment processing, utilities used in production, shrink-wrap, labeling, etc.

Add up all these costs to get the total variable cost per unit.

3. Calculate Margin Contribution Per Unit

Subtract the total variable cost per unit from the selling price per unit:

This result represents how much money each sale contributes toward covering your fixed costs (like rent, salaries, equipment) and generating profit.

4. Determine the Margin Contribution Ratio

To understand your margin in percentage terms, divide the margin contribution per unit by the selling price per unit:

This ratio shows what percentage of each sale is available to cover fixed costs and profit.

5. Factor in Fixed Costs

To determine how much you need to sell to cover all your costs (the break-even point), divide your total fixed costs by the margin contribution per unit:

This tells you the number of units you need to sell to cover all your expenses.

6. Analyze and Adjust

Review these calculations regularly and adjust your pricing or reduce costs to ensure a healthy margin contribution that meets your financial goals.

By understanding and applying these steps, you'll have a clearer picture of how much each sale actually contributes to your bottom line.

CHEAT SHEET

By understanding and applying these steps, you'll have a clearer picture of how much each sale actually contributes to your bottom line.

Now that you understand the difference between markup and margin, it’s time to dive deeper into the next crucial concept for your handmade business: margin revenue. This metric can help you understand how much of your sales actually contributes to covering your costs and boosting your profits. Ready to learn more? Check out our detailed guide on How to Calculate Your Margin Revenue and Why It’s Crucial for Handmade Sellers! Confused? No worries! For a little extra magic, I created the Product Pricing Potion—a magical tool that calculates pricing, tracks costs, and organizes all your numbers in one enchanted place. Join the Wholesale Magic course for more game-changing strategies and elevate your content game today! ✨