Ok if you are thinking… “I don’t need to know this”… I hate to break it to you but it is crucial if you are serious about your business.
What do I mean by contribution?
If you have rented a room at a clinic you have to pay for that clinic whether you use it or not. These sort of costs that stay fixed whether you do 2 sessions or twenty are called ( not surprisingly!) fixed costs.
What are all your fixed costs?
In addition to fixed costs there are costs that go up as the new of sessions ( sales) go up… for example couch roll, oils etc. These costs are called variable costs as they change depending on the number of sales made.
So if you take the sales price for each session ( say £38) less the variable cost of each session (say £3) you are left with the “contribution” of £35 for each session. Why is it called a contribution? Because it is a contribution to fixed costs. So your first sales will be making a contribution to fixed costs and when that cost is covered ( called the break even point) you start making a profit.
To work out your break-even quantity divide the total fixed assets by the contribution per session. If your total fixed costs are £700 in a month, taking the contribution per session of £35 you will need to do 20 sessions in a month just to break-even ( £7,000 / £35). It is only who you get to the 21st session in the month that you start to make a profit.
What is your break-even sales quantity?
When you have different products or services you can work out a contribution for each product or quantity and calculate the optimum contribution to cover your costs. Thus you may have a contribution per session of £45 for each hour and a half session for say aromatherapy and £35 per hour session for reflexology. Thus the contribution per hour if £35 for reflexology and £30 for aromatherapy. If you are restricted to the number of hours you can rent a room in a clinic the optimum contribution would be to maximise the reflexology sessions.
What is your optimum contribution for each product or service?
Obviously the more products and services that you have the more complex the interaction is…. but it is worth having a sense of which product optimises contribution so if you have a clash of resources you can make a better decision based on real figures.
The more information you have about your optimum contribution the better decisions you will make and the better financial results you will get.