Profit margin isone ofthose
Essentially, abusiness’s gross profit margin isameasurement ofhow much money acompany ismaking. For example, ifittakes $1tomake aproduct andyou sell itfor$2, you’ve got a50% profit margin.
That’s thebasic idea, but let’s behonest: inpractice, it’s alittle more complicated than that. And there are some factors that influence profit margins that are important tothink about. Plus, what isagood profit margin forretail?
We’ve got you covered.
What Should You Know About Profit Margins?
Sowealready know that gross profit margin can becalculated byaccounting forthecost ofproduction andthefinal sale price. But what’s theactual gross profit margin formula?
Ok, get ready forsome math (stick with ushere).
How doyou calculate gross profit margin?
First, subtract thecost ofgoods sold (COGS) from thenet sales. Next, divide theresulting number bythenet sales tocalculate gross profit margin asadecimal. Convert thedecimal toapercentage tofind gross profit margin. Here’s anexample:
- Abusiness makes $5,000,000byselling phone cases.
- While making thephone cases, thecompany creates $2,000,000inlabor andmaterial costs.
- Tocalculate her company’s gross profit margin, theCEO subtracts theCOGS from net sales ($5,000,000minus $2,000,000=$3,000,000).
- Next, she divides that resulting number byher company’s revenue toget adecimal ($3,000,000divided by$5,000,000=0.6).
- After converting thedecimal into apercentage, she finds that production costs consume 40% ofsales, resulting ina60% gross profit margin.
Why does Gross profit margin matter?
Gross profit margins are anindicator ofyour retail business’s health. Understandably, ifthemargin istoo low, you won’t make enough money.
What isNet profit margin?
Ifyou’re learning about gross profit margins, you’ll probably come across net margins. Sowhat isabusiness’s net margin? Think ofitlike this: Gross profit margin ishow much money isleft over after subtracting thecost ofgoods sold, while net profit margin ishow much money isleft over after accounting forthings like operating expenses, debt, andtaxes— aswell astheCOGS.
What IsaGood Profit Margin forRetail?
Profit margins vary from industry toindustry— byalot.
According todata analyzed inJanuary 2021, theadvertising industry typically sees gross profit margins ofabout 24%. Meanwhile, thepharmaceutical industry enjoys margins slightly over 70%. And that wide range doesn’t stop with commercials anddrugs.
Gross profit margins byindustry
- Education: 41.15%
- General Electronics: 26.53%
- Food Wholesalers: 15.49%
- Online Retail: 42.53%
Soprofit margins vary, but what isagood profit margin forretail? While there isn’t aspecific number toaim for, you can get abetter idea ofgood profit margins forretail bylooking ataverages inspecific retail industries.
- Women’s clothing: 46.5%
- Shoes: 42.6%
- Supermarkets andGrocery Stores: 28.8%
- Pet Supplies: 43.6%
Soyes, like alot ofthings inbusiness, there isn’t a
How ToEnsure aGood Profit Margin forRetail
What isagood profit margin forretail? Itdepends ontheindustry, but thesteps toensuring your business has healthy margins will generally look similar nomatter thenumber you’re aiming for.
Tolearn about these
What influences profit margins forretail businesses?
Number one: Operating costs
Operating costs (including things like paying employees, purchasing shipping materials, andsavings funds formarketing campaigns) have tobesubtracted from your revenue when you calculate your retail business’s net profit margin. Ifoperating costs are too high, thebusiness might not make enough money tofunction.
Number two: Marketing practices
Poor marketing practices will depend onthebusiness, but ifyour company ispursuing ads that don’t make thesale orflyers that aren’t connecting with shoppers, your operating costs will goupandyour net profit margin will godown.
Number three: Pricing
This one may seem obvious, but pricing really isabig factor inboth gross andnet profit margins. But don’t just think about prices that are too low. Ifyour company prices its products too high, you might lose potential customers. Sometimes, alow price, high volume business model isbest.
How doyou create agood profit margin forretail?
You can make sure your business’s profit margins are healthy bylooking atwasteful practices associated with thethree
- First, think about what costs your business money ingeneral andmake changes tominimize loss. Beonthelookout forunused orinefficient services, like old accounting software, andfind more
cost-efficient alternatives. - Next, develop amore advanced marketing strategy that prioritizes impactful mediums, such asdigital ads. (Ecwid can help ifyou don’t know where tostart.)
- Finally, avoid missing your ideal pricing target byaccounting forfactors like themarket average, manufacturer recommendations, andcustomer psychology. Ultimately, prices need toreflect what theshopper iswilling topay.
Profit Margins andEcommerce
Ifyou’re ready toimprove your retail business’s profit margins, expanding into ecommerce might betheright move. Data shows that online retail stores have some ofthehighest gross andnet margins intheretail market— with ecommerce retail enjoying gross margins more than 18% higher than thegeneral market.
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- Online Retail Industry Overview andTrends
- How ToStart anOnline Retail Business
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- How toPrice aProduct forRetail Business Beginners
- Your Complete Guide toProfit Margins forRetail Businesses
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- How toChoose The Best POS Systems foraRetail Store
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- Retail Insurance: Types ofRetail Business Insurance
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- What isRetail Business Management: Perfect Manager’s Guide
