It’s important for you to know how to calculate your profit margin. It is not a fixed percentage and many factors play into it; the product, the market, the demand, your costs and others.
First, it’s not realistic to expect to earn a 100% profit on all your products, just because you are buying them at wholesale prices. Even really big chain stores can’t expect a 100% profit margin on the majority of their products offered. It is simply not the norm.
Can You Negotiate Profit Margin with Your Supplier?
Genuine Wholesale suppliers won’t calculate your profit margin for you. It is not their responsibility and they do not know all the details involved, nor should they. They are there to sell you products at wholesale. But you can negotiate better wholesale prices which will improve your profit margin. You usually can’t do this right away though. You have to build a relationship or have some documented experience behind you.
But something that always holds true, regardless of your relationship with your supplier or experience, is that your purchase volume impacts your profit margin. Hard and fast rule of wholesale is, the more you buy in volume, the cheaper each individual item gets.
Profit Margin Guidelines
There really are no hard rules when it comes to your profit margin. There are a very few guidelines about what you should expect to earn and it really is based on your personal preference and what you can afford to get by with.
Generally speaking, you shouldn’t sell products where you can’t earn a minimum 15% profit and even then most online retailers aren’t happy unless they can earn a 30 to 40% profit.
How to Calculate Profit
Calculating your profit margin is not just a case of subtracting your wholesale cost from your retail price. For example, buying products for $5.00 each and then selling them for $10.00 each, does not yield you a 50% profit.
Your profit is your retail price less your total Cost of Goods Sold (known as COGS). Your COGS includes all the costs incurred in selling a product – the advertising costs, hosting costs for your website, or the listing fees for your auction, etc. You have to find that COGS number in order to determine your profits.
Why It’s Important
If you carefully understand your true profit margins, you’ll be better at choosing the right products to sell in your business. Avoid trying to achieve an absolute value for your profit margins; they will vary from product to product. You must calculate the TOTAL cost of selling all your products, so you can determine what your REAL profit margins are per item. Anything not included will decrease your profit per item!