It’s no secret at Omnitail we don’t necessarily follow the standard agency metrics – like ROAS and A/S. In fact, it’s right in our name: We’re “The Profit-Driven Marketing Agency.” New clients are often surprised to find, though, that the monthly reports they receive don’t contain any metrics labeled “profit.” Instead, they’re built around two other industry metrics: contribution, and contribution margin. As we onboard and work with these clients, we’re often asked, “What are contribution and contribution margin?”
What is Contribution?
The simple answer is “profit” – or rather, the amount that paid ads as a channel contribute to overall operating profit. In-depth, contribution refers to the dollars leftover after cost of goods, other variable costs, and ad spend have all been accounted for. For example, you might accrue $1,000 in revenue from paid ads in a given month. The cost of the goods you’re selling averages 35% of revenue (so for this chunk of revenue, cost of goods will account for $350), and your monthly shipping cost for sales attributed to paid ads is $100. You’ve also spent $200 on advertising. Here’s how that would shake out: