Contribution margin

Definition in business administration

In business administration, explanations can often be very detailed and complicated. However, this definition appears to us to be generally valid and comprehensible.

The contribution margin (CM) is the difference between the turnover and the variable costs in a company.The amount thus shows what is available to the company to cover fixed costs, i.e. how much an individual product contributes to covering fixed costs.

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The contribution margin statement is integrated into the cost and benefit accounting. Be differentiated

• Unit margin (unit price — variable unit quantities)
• Total contribution margin (total revenue — total variable costs = contribution margin x sales volume)
• Relative contribution margin (contribution margins/production factor consumption)

How is the contribution margin applied in the hotel industry?

Transferred to the hotel industry, the contribution margin can help you find out when your hotel is economically profitable. The calculation is important, for example, for break-even analysis.

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Each individual hotel room (or hotel deal) should generate its contribution margin. The price of the room sold must therefore ensure that at least the variable costs are covered. You can also find more detailed explanations of how to calculate the lower price limit here in our lexicon.

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In the hotel industry, too, there is a distinction between the total contribution margin and the unit contribution margin, i.e. the db per room.

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Quick, simple example:

• The variable costs per room are €25, our room rate is €100.
• This results in a db of db=€100 — €25 = €75.
• The room therefore contributes €75 to cover the fixed costs.

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What are the requirements for a good contribution margin calculation?

It is important that costs are presented transparently. Every hotel should be able to precisely determine variable and fixed costs.

To the fixed costs include rents, leases, interest, fixed wage costs, IT costs, etc. They are independent of workload or season.

To the variable costs This includes, for example, the consumption-related part of electricity costs (not the basic charges), the use of goods/groceries, commissions, etc. These costs only arise if there are actually guests in the hotel.

Furthermore, the calculations should be included in all departments of the hotel. This is because they not only have an influence on direct price calculation, but also on marketing, for example.