Contribution margin. What is it?

The thumbnail version:

  • Understanding “contribution margin” is a good first step to managing the profitability of your shop.

The full version:

Let’s face it, most textile screen shop owners and managers would rather spend time handling interesting art and reproducing it as a great print on a Tee than concerning themselves with something called a “contribution margin.”

Every job must make an adequate contribution to fixed expenses; this is the “contribution margin”

But, and it’s a BIG but, ignore “contribution margin” and you may no longer have a business to produce great prints. So what is “contribution margin”? Joe Knight of business-literacy.com has a good definition: “When you make a product or deliver a service and deduct the variable cost of delivering that product, the leftover revenue is the contribution margin.”

In a textile print shop context that means that if you take the quoted price of a job, deduct the variable costs such as film, emulsion, ink, chemicals (anything you wouldn’t pay for if you didn’t run the job) what you’re left with is the contribution margin. Now, the point of course is that the contribution margin had better be a positive number in order to help pay for fixed expenses such as rent, utilities, and the staff that will be on the clock regardless of whether they’re producing or not.

Admittedly, in calculating “contribution margin” it’s not always obvious which is a variable cost and which is a fixed expense, but you get the idea of the importance and purpose of the “contribution margin” . Every job must have a contribution margin (the bigger, the better) for a shop to survive and thrive.

Understanding “contribution margin” is a good first step to managing the profitability of your shop.