Contribution margin = price − variable costs of that sale
$189 − $22 − $3 = $164
Which costs come off, and which stay out?
Take off a cost if it would not exist without this one sale. Lunch for a guest, the postage on a parcel, the commission a booking site keeps and the card fee are all variable. A cost you pay whether you make the sale or not stays out: the lease, the insurance, your bookkeeper, a staff member on a fixed roster.
The line can move. A guide paid by the day is a fixed cost for that departure and a variable cost for the decision to run it at all. Pick the question first (one more guest, or one more tour) and the line falls in the right place.
What does each extra seat on a Darwin day tour contribute? (example figures)
A Darwin operator runs a 12-seat day tour to Litchfield at $189 a head. Bookings come in two ways: direct through the operator's own website, or through a travel booking site that keeps a 20 percent commission. Some of the direct bookings come from Google Ads, at $45 in ad spend per booking.
| Direct, no ads | Travel site | Direct, from Google Ads | |
|---|---|---|---|
| Ticket | $189 | $189 | $189 |
| Lunch and snacks | $22 | $22 | $22 |
| Card fee or commission | $3 | $38 | $3 |
| Ad cost per booking | none | none | $45 |
| Contribution per guest | $164 | $129 | $119 |
The owner had been trying to move guests off the travel site to save the commission. The table says a guest bought through Google Ads leaves $10 less than one the travel site sends. Both are worth having. The cheaper fix is to win more of the free direct bookings, from repeat guests, hotel desks and reviews, than to buy them at $45.
Why is the fifth guest worth more than the first?
Each departure has fixed costs: the guide's day rate, fuel and the vehicle lease come to about $620 whether 4 people book or 12 do. At $164 a direct guest, the first four seats pay for the day (4 × $164 = $656). Every seat after that is almost all profit. That is why operators discount the last empty seats the night before. A seat sold at $120 still contributes $95 once the bus is going anyway, while an empty seat contributes nothing.
Where does the ad cost per booking come from?
CoraVision reads each campaign's spend and conversions (Meta calls them results) every night from Google Ads and Meta, so it holds the ad cost per booking, the part of the sum the ad accounts can see. The commission, the lunch and the fixed costs of a departure are in your own books, and putting them beside the ad numbers is how a channel gets judged on what it leaves rather than what it bills. When the plan's one number is profit, that is the figure to work from.
Questions
How is contribution margin different from gross margin?
Gross margin takes off the cost of the goods or the labour that made them. Contribution margin also takes off the costs of selling that one item: commissions, card fees, packaging, the courier. For a shop paying a marketplace 15 percent a sale, the gap between the two can be most of the profit.
Should ad spend count as a variable cost?
Many owners work it out twice: once before ads, to see what a sale is worth, and once after the ad cost per sale, to see what an advertised sale leaves. The second figure is the one to compare channels on, because each channel brings its own cost per booking.
Can contribution margin be below zero?
Yes. A sale through a deal site at half price, with a commission on top, can cost more to deliver than it brings in. Every one of those sales makes the business poorer before rent is even counted, so more of them is worse.