Contribution Margin is the revenue remaining after subtracting the variable costs directly associated with generating that revenue. In hotel revenue management, it helps evaluate how much revenue from a booking, customer segment, or distribution channel remains available to cover fixed costs and contribute to profit.
Formula
Contribution Margin = Revenue − Variable Costs
Contribution Margin Percentage = (Contribution Margin ÷ Revenue) × 100
Practical Example
Suppose a hotel receives a room booking worth $200 and incurs $50 in variable costs directly associated with that booking.
Contribution Margin = $200 − $50 = $150
Contribution Margin Percentage = ($150 ÷ $200) × 100 = 75%
The booking generates a contribution margin of $150, or 75% of its revenue, before fixed costs and other expenses not included in the calculation.
How to Interpret Contribution Margin
Contribution margin helps hotels compare the financial value of different booking opportunities. For example, a booking through an OTA may generate more gross room revenue but incur higher distribution costs than a direct booking. Comparing contribution margins can help revenue managers assess the value of each channel more accurately.
The calculation depends on which costs are classified as variable and included in the analysis. Hotels should apply consistent cost definitions when comparing bookings or segments.
Related Terms
Market Segmentation · OTA (Online Travel Agency) · ADR · Revenue Management