In plain words
The contribution margin ratio is contribution margin divided by revenue. A ratio of 40% means the order keeps 40 cents of every dollar the customer paid, after the costs the order caused.
It is the figure to hold a discount against. A discount comes off revenue at full value, while most costs stay where they were. So a discount takes a much larger share of the margin than of the price.
Formula
- Contribution margin ratio = contribution margin ÷ revenue
- Break-even return on ad spend = 1 ÷ contribution margin ratio
Worked example
The $40.00 bag keeps $15.36, a ratio of 38.4%. The three-bag bundle at $102.00 has a ratio of 47.1%, even after its 15% discount.
Take 10% off the single bag and it sells for $36.00. The engine puts its ratio at 32.4%: a tenth off the price, and a much larger share off the margin.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
The ratio is not the money
A high ratio on a small order can earn less than a low ratio on a large one. An order that keeps 50% of $20 earns $10. One that keeps 35% of $60 earns $21. Rank offers by the money per order or per visitor, and use the ratio to see how exposed an offer is to a discount.
Using it
Use the ratio to size discounts and ad budgets, and the money to choose between offers. Before a sale, work out the ratio at the sale price, not at the list price. When the ratio differs a lot between options of one offer, the mix of options sold moves the blended ratio as much as any price change does.