CM has been the talk of ecom twitter for the past couple months as if no one in these small orgs were running their bootstrapped companies profitably... In massive orgs where marketing is separate from finance it's east to understand how the problems manifested as the incentives were misaligned and there was no cross-department communication. But if you're a small ecom operator, there's just no excuse not to run your biz this way. You can still set a ROAS target, you just need to back into that number from your CM calculation. CM is where you find the levers to become more profitable.
A lot of them aren't running profitably. A lot more of them take on funding (unknown to most people), and burn through cash because they don't understand the basics.
I actually got the idea for the article from ecom twitter. I've always called contribution margin "flow through profit", then realized what they were talking about and thought "how is this a new concept to you people? How have you been running your business all along?".
i feel like i have to read this several times over to understand contribution margin properly, this was very valuable. was always confused why fixed costs were ignored in favour of just variable and couldn't understand how big companes profited off anything.
if i'm understanding correctly in the example, you want to use money to advertise so long as there's even a tiny bit of contribution margin per unit because you can make it back from growth of units sold?
is that right? its late night and i'm happy to ask basic questions because i haven't run a business before so it'll probably help someone, and hopefully me too.
You want to use money to advertise so long as there's even a tiny bit of (contribution margin minus advertising). If contribution margin is $9 and you pay $8 to acquire that customer, $1 flows to the profit line. If contribution margin is $2 and advertising is $0 (wholesale deal), $2 flows to the profit line.
More valuable content than what you learn at an MBA program. 👍
Indeed.
when this formula really 'clicks' in your mind and you implement it... life truly changes quickly. You broke this down so simply. Great work.
Thanks!
CM has been the talk of ecom twitter for the past couple months as if no one in these small orgs were running their bootstrapped companies profitably... In massive orgs where marketing is separate from finance it's east to understand how the problems manifested as the incentives were misaligned and there was no cross-department communication. But if you're a small ecom operator, there's just no excuse not to run your biz this way. You can still set a ROAS target, you just need to back into that number from your CM calculation. CM is where you find the levers to become more profitable.
A lot of them aren't running profitably. A lot more of them take on funding (unknown to most people), and burn through cash because they don't understand the basics.
I actually got the idea for the article from ecom twitter. I've always called contribution margin "flow through profit", then realized what they were talking about and thought "how is this a new concept to you people? How have you been running your business all along?".
i feel like i have to read this several times over to understand contribution margin properly, this was very valuable. was always confused why fixed costs were ignored in favour of just variable and couldn't understand how big companes profited off anything.
if i'm understanding correctly in the example, you want to use money to advertise so long as there's even a tiny bit of contribution margin per unit because you can make it back from growth of units sold?
is that right? its late night and i'm happy to ask basic questions because i haven't run a business before so it'll probably help someone, and hopefully me too.
You want to use money to advertise so long as there's even a tiny bit of (contribution margin minus advertising). If contribution margin is $9 and you pay $8 to acquire that customer, $1 flows to the profit line. If contribution margin is $2 and advertising is $0 (wholesale deal), $2 flows to the profit line.
ah okay thankyou