Calculate Your Margins
Arguably one of the most popular phrases strewn throughout the business world is people go into business for one thing, and that is to make money. Now certainly there are other motives to creating a business, but ultimately the business has to become profitable at some point to be sustainable. Service based or product based, one number you must calculate are your margins. This is the percentage of profit you make on a product or service you provide your customers.
The percentage varies greatly depending on many factors. For some industries a 5% margin may be acceptable while others a 40% margin must be obtained to be deemed respectable. No matter what the margin is, it is important to know yours.
Simply put, you can take your revenue, subtract out costs, divide that by your revenue and come up with your profit margin. For example, widget X sells for $10 and it takes $4 to make and sell the final product. That means your profit margin is 60% or $6 per widget. The $4 costs to make and sell widget X can include raw material, advertisement, shipping, and storage.
Profit margins can allude to the sustainability of your business. Odds are, within your industry you know people or groups that have been in your market for years. Conversing with them about margins could be a way to gauge where you need to be within your chosen space.
Referring back to the calculation of profit margin, you’ll want to know every dollar that goes into the $4 cost to sell widget X and how volatile those data points are. For people in the auto industry, oil prices can have a large impact on profit margins, thus leading to fluid pricing adjustments. Ensuring your profit margins are healthy will lead to sustainability.
Another benefit to staying on top of profit margins is you ability to adjust to the market place. For example, you need a 20% margin for this particular product to remain viable. You set the margin at 40% and the market is slow to react due to the high price point. From here, you can either adjust the selling price and shrink the margin or adjust the cost to product the widget.
Regardless of the avenue you choose, the point is you are aware of how much wiggle room you have. It wouldn’t make sense to have a product that needs a 20% margin and begin selling it with a 25% profit margin as this allow for minimal room to maneuver.
Every business needs to know and analyze their profit margins on a regular basis. Some markets require more monitoring than others, and it is up to you to decide. Another item to consider is the profit margins when you have sales. Having a sale doesn’t mean taking a loss, but rather trimming the margins to bring in foot traffic in hopes of converting more sales and return customers. Either way you slice the data, you can begin building healthy margins that lead to a profitable and healthy business.