Do you know how to calculate the profit margin of a product? This indicator is important to be able to price products correctly and evaluate whether or not a certain item is worth selling. Such care protects your business’s finances and allows you to adjust your offers more intelligently.
Therefore, this calculation is very valuable for small businesses, which tend to work with tight budgets. Furthermore, the fact that the profit margin value helps you correctly price your business allows you to make more strategic decisions.
If you want to know the proper way to calculate the profit margin of an item, keep reading and check out our recommendations!
What is a product’s profit margin?
The profit margin is the percentage of the value of a given object, which corresponds to the return that this merchandise brings to your store, that is, how much financial result it brings to the business. In order to discover this number, you must have good financial control over how much you spend, including costs and expenses, to produce each product.
After all, these values will be considered when calculating the profit margin. Furthermore, you need to have control over the prices of each item . This is another fundamental element that enters the calculation.
Therefore, calculating the profit margin even helps with the financial organization and financial control of your business, since some numbers are needed to make the calculations. Now, what exactly is a product’s profit margin for? Check it out in the next topic!
What is a product’s profit margin for?
The profit margin of a product has more than one use for retailers and is an important element of a company’s accounting. This indicator is one of the components of a business’s budget and financial planning , and should be considered in sales strategies and pricing.
If you work with a mix of different products, the profit margin is even more important so that you understand which are your flagships and which items may stop selling or require adjustment. Below, check out more advantages of calculating a product’s profit margin!
How important is it to calculate the profit margin of a product?
Calculating the profit margin of a product is important to assess whether the prices of each item are covering production costs and bringing a financial return to your business.
There are three options:
- or the product brings profit to your business, that is, the production costs are lower than the value received from the sale;
- or the product brings losses to the company, that is, production costs are higher than the value received from sales;
- or the product brings neither profit nor loss, that is, the sales value covers production costs, but there is no profit.
Having this data at hand is essential for the retailer to have a broader view of their own business and finances , which directly contributes to the company’s financial health.
Now that you know what a product’s profit margin is and understand the advantages of calculating it, let’s see how this indicator is calculated!
How can I determine a product’s profit margin?
The profit margin of a product can be calculated using a simple formula that is easy to apply in your day-to-day business. By relying on this resource, you can improve your management and have more control over the financial performance of the project. See below the main steps to calculate the profit margin of your products.
Know the calculation formula
The first step to obtaining this value is to list the production costs and expenses, in addition to establishing the sales price of each item. These variables are used to measure the profit margin they present for your business.
For this calculation, you must reduce production costs and expenses from the sales price of that product and divide the result by that same price, as shown below.
Profit margin = price of the item considered − (production costs and expenses) / price of the item considered
Find out how to get the value in percentage
A good way to evaluate which products bring the greatest return is by comparing them. However, making this type of assessment with monetary values can cause confusion and hinder interpretation.
In this case, you can obtain the profit margin represented as a percentage to understand how many percent of the sales value represents the profit obtained. To do this, simply multiply the previous result by 100.
This will make it easier to make comparisons and understand the contribution of each item to generating results.
Understand how to perform the calculation in practice
Let’s look at an example to help you understand how to execute this computation.Assume you sell a diary for R$60, with a cost of R$20 and costs of R$10, and you wish to calculate the profit margin of this product.In this situation, the computation will look like this:
Profit margin = 60 − (20 + 10) / 60 × 100
Profit margin = 50%
Thus, the agenda’s profit margin is 50%, that is, this product is bringing a good financial return to your business. If the value was negative, such as -50%, you would have to reconsider production costs or adjust the price charged for the item.
How do you know if the profit margin is good?
One of the main objectives of this indicator is to evaluate whether what you sell brings a return. With this, it is possible to optimize the financial health of your business and maintain organic growth.
Therefore, there is no standard to define whether a profit margin is good or not. You should evaluate this number according to your industry. For example, 10% may be an excellent margin for your segment, but not so good for another.
Ideally, you should carry out market research to understand whether the margin of your products is as expected for your segment or whether it is necessary to make adjustments to align prices.
What are the tips for establishing a good profit margin?
Understanding how to establish a business’s profit margin is a relevant step towards achieving financial sustainability and optimizing results. Thinking about helping you with this, we have put together some tips. See more.
Know how to price
The first step to establishing a good profit margin for your business is to think about pricing. In this sense, it is important to take into account the positioning of your brand, the segment in which it operates and the number of products it sells.
For example, if you have a strong name in the market, built through differentiation strategies compared to the competition, there is more room to determine a higher profit margin in your business.
Now, suppose that your business’ strong point is selling large volumes, so, if you are in a very competitive market, you can choose to have a shorter margin, but one that makes you earn through the total sold in the month.
Carry out cost planning
Keeping in mind the costs involved in your company is important to define the profit margin appropriately. This way, you avoid working in the red and can achieve positive results that maximize the profitability of your business.
For example, if, when setting the price of your establishment, you forget to consider your monthly expenses, this will probably harm your cash flow and leave your business in trouble.
Furthermore, investing in this planning can help you find the bottlenecks that make you spend too much. This way, you can look for areas where you can reduce costs and improve results.
Analyze your market
As already mentioned, the profit margin may be related to the market in which you operate. Therefore, it is important to carry out good benchmarking to understand what the potential gains are for the business.
Furthermore, by putting this tip into practice, you can understand how it is possible to innovate in your niche. Thus, you can use differentiation marketing to increase profitability and achieve growth over time.
What are the advantages of having a good profit margin?
Understanding how to calculate a product’s profit margin is extremely useful and can provide several advantages for your business. Through it, you optimize the financial health of your establishment and stand out from the competition.
Furthermore, with this indicator, you have enough inputs to define prices, doing the reverse calculation, considering production costs and the profit margin you want to obtain. Just replace the values according to the calculation model we presented previously.
See how it’s not that difficult to calculate the profit margin? By following our step-by-step guide, you will be able to have more financial organization and greater control over the prices of your products, something important in the monthly balance of your business.
