Sorry, I have a flat labor profit built into that one that makes it more complicated. A simpler one is another that’s $33 with a $14.83 COGS = $18.17 profit = 55.06% margin.
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oh, I don’t have any business education, I am self taught. So I never learned most of the business lingo, just how to do things. I figured those number made no sense, but not actually in THAT way. I guess in 26 years I never once calculated an official “margin” and have only ever cared about my net profit percentage. So when I read it I thought Margin = Net profit…
but then looking at your SECOND example…i guess I had it right after all? It’s impossible for me to narrow down my profit per item as I sell 70% of my inventory to people that order multiple items and only some pay shipping…
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I can’t tell if you’re being snarky? I think so, lesson learned and I’ll dip out of the conversation.
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Generally it doesn’t make sense to calculate it on a per item basis. You would usually broadly apply standardized cost numbers to all items, or certain category of items (eg. fragile items incur additional cost) when estimating whether a product is good or not.
The more products you sell, the broader those cost categories become to simplify decision making.
One example from me is, I use 1 fixed number for FBA fees for all products under 1 pound, even though the fees vary a bit. I also use 1 fixed estimate for inbound shipping costs for those products as well. The actual variance in cost from the number I use is less than a dollar and has very little impact on purchasing decisions.
If you’re doing high volume low margin products, then you need to be more accurate with your estimations than if you’re selling high margin products. Keep in mind this is not accounting for your actual costs for bookkeeping, this is for evaluating whether a product is worth selling or not.
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I wasn’t being snarky..I was trying to follow the math…
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that’s how I do it. I carry a line from one manufacturer that has a little over 1000 products. Now they are slightly different weights, so their expenses are not all the same, so I average it out…some are hot sellers, some sit on the shelf for months, but I continue to carry the whole line as it is part of a special deal we made.
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Ok cool. Yes, I just do profit divided by COGS. For the first one I posted, I have a labor cost that I include in COGS and then add it back to the Profit calculation so it washes out - since it’s really just a notation for me on my pricing sheet, particularly when I’m doing bundles. When I posted the #s I didn’t add it to the profit so the numbers didn’t line up.
But the straight profit/cost is what I use for most. I am low volume, high(er) margin.
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but isn’t your labor part of your profit?
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Yes, that’s why I add it back in to the profit calculation ((price - COGS) + labor) so it’s a wash - if not, it would increase my COGS and decrease my profit amount (it’s dumb, I should just take it out of the calcs and make it a notation only). Honestly I can make things so quickly it’s not even worth it for me to calculate it - but since it’s a little more work I put like $4 or $5 in there as a mental note to remind myself.
All of my things are made to order (I’m handmade). Without that in there, that item is COGS $15.99 / $33 = 51.54% margin.
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Labor to make the product is part of COGS. Overhead labor, like the time you spend filing taxes is not part of that.
General Motors is most definitely including what they pay UAW when calculating the cost of getting a finished car off the assembly line. What they pay their accountants/executives is not included in that cost.
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oh I see. That makes a big difference of course…
For my poop bags, which have some weight, this is my biggest cost too.
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The one factor which has not been accounted for is time. If you have bought into an item at an inventory level that is going to last for 5 years or more, the market value of that item may change over that period. In addition, the related costs to sell that same item may well increase. And on top of that, the related profit needed to sustain an income will increase over time. So for us, the target margin is a moving target that needs to be re-evaluated on at least a yearly time frame to maintain a successful business.
Our formula is
COGs + current related costs to sell + profit needed to sustain an income
COGs is (for us) somewhat controllable and stable over 25 years. Current related cost to sell and the profit needed to sustain an income are always dependent on market pressures and factors we have no control over but are part of doing business.
Thus time has taken shape as in the following:
COG of $1.00 sold at $7.95 back 25 years ago. (shipping postage average was $0.95)
COG of $1.25 currently sells at $29.95. (shipping postage average is $3.90)
The idea of a Margin Target varies on the product sold … grocery vs hard line vs jewelry …
For us, it would be hard to use a rule like 2.5x or 3x as a one size fits all type of rule doesn’t fit every product type.
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In general, determining how much “mark up” or “margin” you want isn’t reality.
In reality, you need to figure out what is the market going to pay for the product, and what your costs are, and then decide whether that product is worth selling or not.
If you’re on an ASIN with other sellers, the lowest price is what you can sell it for, end of story (for the most part). Even if it’s your own brand, your price needs to be competitive with similar products or you won’t sell much, if anything.
Personally I have products that range from 10-50% gross margin, because there’s so many factors into evaluating whether a product is good or not. A 10% margin product that has minimal returns and minimal problems and moves quickly can easily outperform a 50% margin product that has a lot of returns and moves slowly.
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This is it right there. I look at how much people would be willing to pay, then see if I can make a profit at that price.
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