What is a product’s profit margin? How is it calculated?
12/01/2022 - Dynamic pricing
The profit margin is the amount the company earns from selling a product. To calculate the profit margin, subtract the production costs from the selling price. The profit margin is what makes the brand or retailer grow. Knowing the profit margin of each item allows e-commerce businesses to assess whether their products are profitable or whether they should tweak their pricing policy. Ultimately, the goal is to achieve appropriate pricing to attract more customers while increasing the company’s profitability. We explain how to calculate the profit margin and what to consider.
Formula to calculate profit margin
The net profit margin for each product is expressed as a percentage. To calculate the profit margin, use the following formula:
Profit Margin = (Sales Price - Product Cost) / Selling Price
To express it as a percentage, multiply the result by 100. Product costs must include both direct and indirect costs to obtain the net profit margin. Direct costs include all costs arising from each item’s production, purchase, and logistics. Indirect costs must include expenses like premises rental, whether physical store or warehouse, employee wages, or services like electricity, water, or internet, etc. You will then have a clear idea of how much you earn from selling each product.
Should I increase my profit margin? How to weigh up the results
The profit margin formula can produce three different results. Anything over 40% is usually considered a high profit margin, maintaining a healthily profitable company. If the result is low, say 10%, you may need to review your pricing strategy to identify revenue-generating opportunities. Either by increasing product prices or by making changes to your catalogue. As a worst-case scenario, a negative profit margin will mean that the e-commerce loses money selling a particular item. Price changes may be necessary to avoid complications in the longer term.
Adjust your prices with pricing software
However clear the results obtained from a profit margin study, it is tricky to implement changes in pricing policy. An exponential price rise can lead to reduced demand and a loss of the most price-sensitive customers. The balance lies in optimising prices armed with more in-depth market knowledge and awareness of fluctuations in supply and demand. You can do this with dynamic pricing tools driven by big data. This software collects millions of data from each market and recommends the best prices to optimise the company’s profit margin. Today’s technology allows advanced pricing rules to be defined based on variables of interest, such as margins. Targets can be set by department so that prices always align with the growth of the e-commerce business.
Category: Dynamic pricing
