Episode Summary
In this episode of the 7 Figures and Beyond podcast, Greg interviews Jon Blair, a fractional CFO specializing in D2C brands, about the critical financial metrics of contribution margin and marketing efficiency ratio (MER). They discuss the importance of these metrics for scaling e-commerce brands profitably, how to calculate them, and the strategic decisions they inform. Jon emphasizes the need for brands to focus on contribution margin dollars over percentages and provides insights into optimizing these metrics to achieve sustainable growth.
You can read the full transcript here.
Key Takeaways
- Understanding Contribution Margin: Contribution margin is calculated as net revenue minus variable costs (e.g., cost of goods sold, shipping, credit card fees). It’s crucial for determining the profitability of each sale and ensuring there are sufficient funds to cover fixed overheads and generate profit.
- Optimizing for Dollars, Not Percentages: Brands should focus on increasing contribution margin dollars rather than percentage ratios. Optimizing for dollars ensures that more revenue contributes to covering fixed costs and driving profitability.
- Using MER for Holistic Performance: Marketing Efficiency Ratio (MER) provides a comprehensive view of the efficiency of marketing spend by dividing total revenue by total ad spend. It helps in evaluating the overall impact of marketing efforts beyond platform-specific ROAS (Return on Ad Spend).
- Tools and Strategies for Improvement: While there are tools like Store Hero to help automate tracking and optimizing these metrics, brands should start by manually analyzing their variable costs and SKU-level contribution margins. Strategic pricing changes, better inventory management, and optimizing product costs are effective ways to improve contribution margins.
- Future Trends in E-commerce: Brands with high Average Order Value (AOV) and high contribution margins are better positioned for growth. Ensuring repeat purchases and being intentional about product development to maintain high margins will be key to thriving in the competitive e-commerce landscape.
Links
Greg Shuey LinkedIn: https://www.linkedin.com/in/greg-shuey/
Jon Blair LinkedIn: https://www.linkedin.com/in/jonathon-albert-blair/
Free To Grow CFO: https://freetogrowcfo.com/
Greg is a digital marketing strategist, ecommerce owner, e-commerce marketing agency owner, and recognized leader in the D2C industry.
With 18 years of experience working with small, medium, and large organizations, Greg knows how to build and execute marketing strategies that drive growth.