# Understanding contributions margins

When selling products, it is very important to understand contribution margins (🇳🇴 dekningsbidrag), and the mechanisms around it, both to understand which sales price should be set on each product, and also to help understanding how much discounts you can offer on a specific product.

## Example

In this example we follow a product all the way from being purchased to being sold, and where we will also look at how much discount you potentially can offer.

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Note that when counting expenses, it is very important to understand the difference between CM1 (Contribution Margin 1) and CM2 (Contribution Margin 2):\
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**CM1 =** The revenue minus direct costs, like the actual cost for purchasing the product. The CM1 also shows how much is left to cover CM2.\
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**CM2 =** CM1, minus the additional expenses, like house rental for the store, salary to the employees, and more.\
\
In our examples we use CM1 unless specified otherwise.
{% endhint %}

### Preparations

* You purchase the product `ZEISSVICTORY` for NOK 1.000 ex. VAT from your supplier Zeiss Watches. Your total expense is then NOK 1.000, and everything on top of that is your profit.
* You decide to sell the product for NOK 10.000 incl VAT to your customers.
* The product has a VAT of 25%.

### Finding the contribution margin: (🇳🇴 dekningsbidrag 1 or DB1)

1. To find the contribution margin we first need to remove the VAT:\
   Net Sales Price = (Sales Price (incl. VAT) / 1 + VAT rate) = NOK 10.000 / 1,25 = NOK 8.000
2. Next we need to get the contribution margin, which is basically your profit:\
   Contribution Margin = Net Sales Price - Cost Price = NOK 8.000 - NOK 1.000 = NOK 7.000\
   This means that for each product sold, NOK 7.000 is available to both cover fixed costs and generate profit.

{% hint style="success" %}
Flow Retail will show the contribution margin both in amount and also in percentage.
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### Finding how much discount you can offer

This of course heavily depends on various factors, like how efficiently the business is being run, etc., but lets try with a relatively general example:

Since the product costs NOK 1.000 ex. VAT, you will need to add the VAT to the price, as you have to pay the VAT. The break-even price is therefore NOK 1.000 + 25% = NOK 1.250.

This means you can sell the product for NOK 1.250 and basically earn nothing. Which is normally pointless, and so you would want to add a minimum contribution margin on top of this, for lets say NOK 2.000 (to cover fixed costs, etc.). This means the lowest price you can sell for is NOK 1.000 + NOK 2.000 = NOK 3.000, and with the added VAT on top of that you get NOK 3.000 + 1,25 (25%) = NOK 3.750.

So, to ensure a certain contribution margin, you should at maximum discount the product down from NOK 10.000 to NOK 3.750, which will cover internal costs (house rental, salary, Flow Retail license, etc.) for a total amount of NOK 2.000.

### Where and how can I see this in Flow Retail?

1. Add one or more products to an order (to become a sale)
2. Press cmd+b / ctrl+b in Keyboard-mode, or tap and hold DG in Touch-mode
3. You can now see the contribution margin per product, both as an amount and also as a percentage

### What is a good contribution margin?

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Anywhere between 20-60% is normal, with most retailers clocking in between 30-50%.
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A contribution margin of 40% means that practically 40% of the revenue will go into covering the fixed costs like house rental, salary, etc., and the remaining 60% will be for variable costs, which includes purchasing the product, shipping from your supplier, and so on - and also hopefully to generate some profit on top.

The higher the contribution margin percentage, the more is left for profit.