What is Contribution Margin is Food Delivery Marketing?

When it comes to understanding how well your delivery app ad spend is performing, contribution margin is a restaurant marketers best friend.

Instead of looking at simple revenue metrics like gross revenue or return on ad spend (ROAS) as a metric to assess performance, contribution margin allows you to compare the relative profitability of different ad and discount strategies compared to either other strategies or to running no campaigns at all.

This makes it a much better way of assessing marketing performance, especially if you are focused on overall profit and margin in your business.

Contribution margin is defined as total revenue minus variable costs. It’s a simple, but powerful formula that tells you: after you take into account all the costs associated with running the marketing campaign, how much profit is left over?

To calculate contribution margin you need to collect the following metrics:

• Total revenue you made from the campaign
• The amount you spent on either discounts or CPC ads
• The amount you paid in aggregator commission
• Your food cost as a % of total revenue

For delivery marketing the formula is:

Total revenue - (ad or discount spend + commission + food cost)

Let look at an example:

Say you ran a flash sale 30% discount campaign on a food delivery app for 5 days.

Over the five days, the campaign generated $30,000 in revenue. Because you discounted 30% you ended up spending $9000 to run the campaign.

Your delivery app commission was 32%. The total commission you paid for the campaign was 32% of total revenue - the discount, or 32% of  $21,000. So you paid $6720 in commission.

Your food costs are 35% of total revenue. Your total food cost was 35% of $30,000 so  you spent $10,500 on food cost.

So plugging this into our formula:

Contribution margin = 30,000 - (9000+6720+10,500)

or

30,000 - 26,220 = 3,780

For this marketing campaign, after you take into account the costs you’re left with $3780.

This is your contribution margin.

It’s important to note this is not your overall or net profit. Contribution margin doesn’t take into account fixed costs like rent, operating expenses, staff etc.

Using contribution margin to compare campaigns

Once you understand the formula and where to collect the data performing an analysis is relatively simple.

Let’s say in the week before you ran the campaign you did zero marketing.

You repeat the process for the week before only this time you will have spent $0 on marketing, but will still have commission and food cost associated with the generating revenue.

You can then compare the contribution margin for the two weeks and see if after the costs of running the campaign, your marketing spend was more profitable than running no marketing at all.

To help you with the calculation you can download our easy to use marketing contribution margin calculator.

Automating contribution margin in your food delivery business.

Contribution analysis is a powerful way of analysing marketing campaign performance in food delivery and I strongly recommend all businesses incorporate this type of analysis into their workflows.

However doing this type of analysis manually can be cumbersome and time consuming, especially if you're running campaigns on multiple delivery apps, or you have multiple brands.

To automate contribution margin analysis, start running your campaigns through Revly.

Revly automatically computes your contribution margin for all your brands and outlets across Talabat, Careem Food, Deliveroo, Noon Food and Hunger Station - and then makes it easy for you to compare any time period.

Getting quick access to all your contribution margin data makes optimizing and analyzing campaigns much more powerful and faster, leading to better overall ROI and ultimately profit.

Request a demo here