Contribution Margin: Are you leveraging this profit trigger?

Do you realize the role variable costs play in your operation?

By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | May 24, 2015

Owners adore continuous profits. Management too adores them; it is only that they have to deliver them. That is not easy. Even when revenues are riding high, often, retaining profits out of incremental revenues is a completely different ball game. Enter the all season all reason elixir - contribution margin.

Understanding how your costs behave in the operation is critical to optimizing contribution margin. It may well provide you that elixir that will make your business your owner's favorite.

Contribution Margin Defined

What is Contribution Margin? Contribution Margin is simply Revenues minus (-) Variable Costs.

Contribution Margin is based on the principle of the extent of contribution a revenue item makes to the total profit. It recognizes that to earn revenues, both fixed and variable costs will be incurred. However, a change in revenue or sales quantity will only affect the variable costs. Fixed costs remain unchanged irrespective of sales or revenue quantities.

So contribution margin takes into account only those costs, which move with business volume - variable costs. Its premise is that by deducting variable costs from revenues, you get an indication of what the bottom line is which is relevant to business volume. This is also the reason why fixed costs do not feature in the contribution margin calculation.

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Sales & Marketing: Selling Experiences

There are innumerable strategies that Hotel Sales and Marketing Directors employ to find, engage and entice guests to their property, and those strategies are constantly evolving. A breakthrough technology, pioneering platform, or even a simple algorithm update can cause new trends to emerge and upend the best laid plans. Sales and marketing departments must remain agile so they can adapt to the ever changing digital landscape. As an example, the popularity of virtual reality is on the rise, as 360 interactive technologies become more mainstream. Chatbots and artificial intelligence are also poised to become the next big things, as they take guest personalization to a whole new level. But one sales and marketing trend that is currently resulting in major benefits for hotels is experiential marketing - the effort to deliver an experience to potential guests. Mainly this is accomplished through the creative use of video and images, and by utilizing what has become known as User Generated Content. By sharing actual personal content (videos and pictures) from satisfied guests who have experienced the delights of a property, prospective guests can more easily imagine themselves having the same experience. Similarly, Hotel Generated Content is equally important. Hotels are more than beds and effective video presentations can tell a compelling story - a story about what makes the hotel appealing and unique. A video walk-through of rooms is essential, as are video tours in different areas of a hotel. The goal is to highlight what makes the property exceptional, but also to show real people having real fun - an experience that prospective guests can have too. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.