Hurdle over your Opex with your contribution margin dollars

Let's look at a very, very simplified way to do media planning for a direct-to-consumer company.

If you want your DTC to make money, effectively, what you have to do every month is get your contribution margin dollars to be higher than the operating expenses of your business.

👉🏼 [YouTube Explainer] - Hurdle over your Opex with your contribution margin dollars

Breaking Down the Break-Even Model

Now let's just look through an example where we want to break even. So let's try to figure out what we need to do to get the contribution margin dollars in any given month to be equal to the operating expenses of the business.

📖 [Similar read] - What is Contribution Margin?

Understanding OpEx

So when we talk about OpEx, we're going to speak about any fixed costs involved in running the company any given month: salary, rent, subscriptions, professional service fees, etc., etc.

So let's imagine that to run this DTC brand it's costing us $40,000 a month of fixed cost.

Understanding Your Unit Economics

Then we need to make sales of products. So if we are selling our product for $100:

• $20 of that product is going to the cost of goods
• $10 is involved in the shipping and freight and other variable cost of delivery to get the product to the customer
• We are buying ads on Meta and we're acquiring those customers at $30 each

This means that when we sell these $100 units, we are getting $40 of contribution margin on average per order.

Calculating Your Break-Even Orders

So then the question becomes: how many $40 contribution margin sales would we need to get in order to break even in the month?

What we would do is take the $40,000 of OpEx that we have to hurdle over and divide it by the number of $40 contribution margin orders that we would be getting to get to 1,000 orders.

Meaning that if we get 1,000 orders at $40 of contribution margin each, that will give us $40,000 of contribution margin, which will equal the OpEx of the business in that given month.

Calculating Your Required Ad Spend

So then we can then ask, okay, well how much money would I need to spend on advertising to get those 1,000 orders?

Let's assume that the acquisition cost remains constant. We then take those 1,000 orders and multiply it by the $30 customer acquisition cost that we mentioned earlier to get $30,000 worth of ad spend in the month.

Putting It All Together

So the $30,000 of spend would get us the $40,000 of contribution margin, which would then equal the exact amount of the $40,000 of fixed operating cost to run the business, getting us to a break-even point.

Simple back of the napkin math. Of course, it's more complicated than this, but this is how you can start thinking about your media plan.