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Profit margin is one of the most critical assessments a business owner will have to make. It measures the profit a company will keep on a particular line of products or services. When the number is higher, it means you will be more profitable.

Use this margin calculator to determine how much to sell an item for. Simply add the mark up to your wholesale cost and the calculator will determine your selling price, profits, and gross margin.

New to the concept? See our FAQ below.

FREQUENTLY ASKED QUESTIONS


What can this calculator do?

Our margin calculator was developed to help small business owners, including retailers, evaluate the profitability of a product line or service - called gross profit margin.

This figure can tell you a lot about your operations, so it’s vital to know how to calculate it. But don't take chances when it comes to your revenue. Using this tool, you can rest assured knowing your figures are accurate.

What is profit margin?

Profit margin is a simple ratio of how much money a product, service, or business generates. It is typically expressed as a percentage of a product's revenue.

Many business owners will use two kinds of profit margins when evaluating their company:

    1. Gross profit margin, which applies to a product line or service.
    2. Net profit margin, which measures the company’s earnings relative to its expenditures.

Our margin calculator was developed to help you calculate the first, gross profit margin.

Why is profit margin important?

Gross margin is important because it determines the amount of revenue your company keeps on each of its sales.

For example, if a product line has a gross margin of 15%, that means every dollar of sales results in 15 cents of revenue.

When It's Important

Calculating gross profit margin is useful when a company needs to determine how much to sell an item for. If a product has a low-profit margin, the business may have to charge more to make selling that item beneficial.

Ideally, you’ll want to generate enough gross profits to maintain your cash flow, manage your financials, and eventually, expand your operations.

How do you calculate gross profit margin?

Calculating your profit margin is actually quite easy when you have the right information on hand.

You'll need to know the wholesale cost to make your product or provide your service, along with the revenue from the product line.

Step One

First, you have to subtract the cost of the goods sold from the product's revenue. Cost of goods sold can include things like materials, manufacturing, and hourly employees relative to your product or service.

Step Two

Then divide the resulting number by the product's revenue and multiply by 100. The answer is your gross profit margin percentage.

When To Calculate

You can do this pre-emptively to establish the pricing of a product, or retroactively to assess your profit margin from the last quarter.

Of course, to make your life easier, you could do all this with our profit margin calculator. You'll save some time from manually doing the math, and you'll know that the profit margin was calculated correctly.

What is a good gross margin?

Gross margins can vary between industries and businesses. What is considered a good profit margin for one company may not be sufficient for another.

To find out where you stand, its best to compare your gross profit margin to that of other businesses in your industry.

Generally, you can find yearly reports of gross profits from industry leaders by sourcing industry driven publications.

Some companies even publish quarterly reports, which you can easily find through a simple web search. If your profit margin is similar to theirs, you can assume that your business is running fairly efficiently.

How can you improve gross margins?

If you'd like to increase your gross profits, here's five things to focus on:

1. Incorporate technology

Using automated processes can greatly reduce your operating costs, especially when compared to the cost of hiring employees.

There are many great management systems to help you oversee your dealings whether its accounting, social media, or automatic re-pricing that you need.

You'll have to pay a bit upfront for premium features, and invest some time to learn the systems, but you'll end up saving on labor costs over time.

2. Offer strategic promotions

Manipulating your pricing strategy can be an effective way to improve gross margins too.

Science shows that 57% of shoppers are influenced by deals, and 91% who used the promotion would visit the same retailers again. The trick here is to make the incentive higher than your average sale price and only offer small discounts.

For example, if your average customer spends $70, offer 10% when you spend $100. This way, you'll still profit from running the promotion while gaining loyal customers.

3. Manage your inventory effectively

It is well-known that stock outs can negatively impact your business and gross margins.

A study conducted at the University of Colorado showed that 30% of shoppers are frustrated by stock outs, and after three stock out experiences 70% of shoppers would switch to another retailer.

4. Provide excellent customer service

With the growth of technology, consumers are able to compare pricing between competitors in a matter of seconds.

This transparency between competitors also leads to a greater price competition. But there's only so far you can go with pricing alone.

Ultimately, this means businesses have to do more and more to remain competitive in the retail market. A recent Harvard study found that delivering excellent customer service can help to generate better returns.

In fact, customers that had a positive experience were likely to spend 140% more than customers who felt their expectations had not been met.

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