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Profit margin
With high production cost, achieving a reasonable profit seems difficult.
Please what profit margin is OK? -
18 Replies
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The average multiple from production cost to retail is 6 times, which is a margin of 83%
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I know the thread is a few years old, but it’s great information thank you! Does the cost when calculating margins include hidden costs like shipping, labor, returns, depreciation, overhead, etc? Or just the straight up cost of the goods themselves? TIA!
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I only add labor cost and 5% more.
I make batchs of 1000kgs. For that material cost + 0.04$ /kg is my total cost/kg.
My packages are 500ml so half of that cost+ 0.15$ packaging cost.
Then multiply that to 2.5-3 for different products and that is my wholesale price.
Or multiply it by 5 or 6 and that is my retail price.
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Ok gotcha! Good info, thanks for your reply!
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@Belassi that’s a high margin.
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If you analyse commercial products in the supermarket you will discover that an 83% margin is the norm, and many are higher (in the cosmetics industry, MUCH higher)
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@Belassi I got lost, would you mind elaborating on how you got to the 83% figure?
6 times cost = 600%
substracting the 100% cost gives 500% profit, wholly different than 83% -
You are confusing MARK-UP and MARGIN. I hope you realise that not knowing the fundamental math of business is not a good omen for success…
% MARGIN = 100 x (PROFIT/SALE PRICE) and PROFIT = SALE PRICE - COST PRICE.
Nobody in serious business uses markup. -
Belassi said:You are confusing MARK-UP and MARGIN. I hope you realise that not knowing the fundamental math of business is not a good omen for success…
% MARGIN = 100 x (PROFIT/SALE PRICE) and PROFIT = SALE PRICE - COST PRICE.
Nobody in serious business uses markup.Gunther said:@Belassi I got lost, would you mind elaborating on how you got to the 83% figure?6 times cost = 600%
substracting the 100% cost gives 500% profit, wholly different than 83%S - Sale
C - Cost
P - Profit
M - MarginIf sale is 6 times more than cost:
S = 6C
P = S - C = 6C - C = 5C
M(%) = 100 x (P/S) = 100 x (5C/6C) = 100 x 5/6
M(%) = 83.33I’m not saying I knew this, just used a little math
Thank you Belassi
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It’s crucial to use margin because otherwise you have no way of dealing with discounts.
EG, if I use 83% margin. I do a deal with Walmart and they ask for a 50% discount on sale price. Immediately I know if I accept that, I have 33% margin left. Out of which I will have to pay a shelf restocker / product demonstrator. So let’s say I need to allow another 10% of the retail price for that. Now I have 23% margin left. Then Walmart comes to me and demands a 25% off sale. Now I know I am in the hole by 2%.
Everyone in business relies on margin. It was the first thing I learned about business practice, even before I learned how to prepare a balance sheet and P&L account. -
Thank you all. Your contributions where quite helpful.
Thanks Belassi -
Interesting figures @Belassi OK, as a manufacturer who sells wholesale, what numbers would you suggest?
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As a manufacturer your wholesale price will be whatever discount you need to give. Supermarkets and chain stores typically ask for 50%. A single reseller, more typically 30%.
Just now I heard an advert on the car radio that Soriana was offering 50% discount on cosmetics. Think about it… either the super is using cosmetics as a loss-leader and making no profit at all, or the suppliers are giving the super 55% or more discount. Gulp. It’s probably a line of colour cosmetics imported from China.
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@Belassi does the 50% discount means that the retailer buys from you at 50% cost, and sells at 100% price
thus the retailer has a 50% gross margin, 100% markup?Or does that mean that the retailer sells at half of your in-store price, to draw customers?
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does the 50% discount means that the retailer buys from you at 50% cost, and sells at 100% price
thus the retailer has a 50% gross margin, 100% markup?
- Yes, that’s correct.
Please note I have only given a simplified view. The retailer may ask for other costs, eg co-pay advertising promotions, special display promotions, favorable shelf placing premium … If you intend going major retail you absolutely need someone in your team who has experience of B2B FMCG sales.
I know we talk about formulating all the time but I think there are many people in this forum with little idea of the realities of the larger world. Which is why I prefer to stay small. -
@Belassi was that consignment sales (for the big retailer)?
Did they ask for a discount as to offer products at a lower price than you do in your store?
i.e. nobody has lower prices than [big retailer name here] -
Retail sales (stores) usually are consignment. In fact you often have to pay THEM for shelf space.
If you want to deal with big retailers first talk to someone who does. Avoid disappointment. -
I heard the biggest disappointment with big retailers
is the low sales volume:
even big brands only sell a few items daily, some days none of your products was sold.OTOH if they have hundreds of stores, sales volume increases
and then you only have to drop products in one place, the retailer warehouse.
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