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Profit margin is the measure of profitability for a retailer. Profit margin can be calculated for anything that you can sell, including products and services.
It is important to measure your margin of profit to ensure that your business is making enough revenue to invest back into your business.
Profits can be used to grow your business through marketing, advertising, additional resources, essential software, etc.
Profit Margin is calculated by finding your net profit as a percentage of your revenue. In simple terms this is done by dividing your net profit by your net sales. For example, if you sell 15 products for a net revenue of $400, but the cost to source and market your product, coupled with business costs, equals $350, then your profit margin is (400-350)/400. This means your profit margin is 12%
Once you have found your profit margin you can look at your online business’ profitability and decide what markup to include on your product. Increasing your product markup will increase your profit margin over time. To discover product markup simply divide the cost of producing a product by the gross profit of the product. In the above example markup would be 14.29%, i.e. (50/350)*100.
• Cost - The absolute cost
to produce or source a product. This includes the cost
of labor, materials, and
variable costs. It is
important to know this cost so you can plan profit accordingly.
• Margin - When pricing a product the margin cost is the percentage increase you apply to the cost in order to make a profit from a sale. During the pricing stage of a product this margin is important to know so it can be altered when needed.
• Revenue - Profit added to the cost of the product equates to the revenue figure, which is the total amount received for a product by a customer. It is important to know the exact amount of money you have received, in order to gauge the success of a product.
• Profit - is your revenue minus costs. In order to benchmark success on a regular basis profit must be known. Profit should increase consistently to ensure growth in a business.
Profit margin differs depending on the industry but a good average is 10%. If you are in clothing, due to the immense competition this percentage can be as low as 2%. Other industries that have higher profit margin include Software as a Service (SaaS) and financial services.
Knowing your profit margin is important as it helps you grow your business by alerting you to excess spending or underperforming products. If your profit margin is below the average for your industry you should reassess your expenses and see where you can cut costs. This could be in the form of changing supplier to a cheaper alternative, spending less on marketing, or optimizing advertising to get more bang for your buck.
A great advantage of having a good profit margin means that you can invest in potential new products that can help you build your brand and catalogue into new markets.
As we have already discussed, profit margin s a super useful metric to have for your business. It can help you plan your spending, and highlight when it is time to reassess suppliers. But if you are a dropshipper profit margin can ensure your success through informing your pricing strategy, marketing budget, and benchmark your business against your competitors.
It is important to note that higher revenue does not mean higher profit margin. If you are spending too much on marketing or pricing products incorrectly, you can end up making less money.
If you are finding that this is the case for you, you can try new suppliers, cut marketing spend on inefficient platforms, unsubscribe from software that you don’t use often but pay for, and generate more revenue through innovative free channels like SEO.
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