As a business owner, it's crucial to understand how your products are performing in the market. One way to do this is by calculating your profit margin regularly. By doing so, you can evaluate the effectiveness of your pricing strategy, make informed business decisions, and identify areas for improvement.
To calculate your margin, you'll need to consider several inputs. These include your average selling price, product cost, shipping/freight, customs/duties, fulfillment cost, warehouse and storage, advertising, and returns. Let's take a closer look at each of these inputs:
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AVERAGE SELLING PRICE
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Your average selling price is the amount you receive for each unit sold. If your pricing strategy varies, it's important to calculate this number regularly. To do this, add your gross revenue from Amazon and divide it by the number of units sold each week (or month).
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PRODUCT COST​
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Product cost refers to the amount your factory charges you per unit. This is a fixed cost that you should know before selling your product.
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SHIPPING / FREIGHT
Shipping/freight is the cost of transporting your products from the factory to the final destination (such as a 3PL or Amazon FBA). Because freight costs vary, you may need to calculate this as a weighted average.
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CUSTOMS / DUTIES
Customs/duties refer to the percentage of your product cost that you must pay in tariffs. You can calculate this by taking your invoiced total from customs and dividing it by the number of units.
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FULFILLMENT COST
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Fulfillment cost refers to the cost of shipping your products from the warehouse to the customer.
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WAREHOUSE & STORAGE
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If you use a 3PL or Amazon FBA, you'll need to add up invoices and units stored to get a baseline reading of your warehouse and storage costs both from Amazon and from your own warehousing.
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ADVERTISING
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Advertising costs can vary greatly, so it's important to stay consistent in your methodology. Consider taking the total ad spend for a week and the number of units sold, then average those out.
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RETURNS
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Returns have costs usually at a consistent rate. By calculating your average return rate and cost, you can evaluate the health of your product.
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MARGIN EXAMPLE
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Once you've determined these inputs, you can calculate your profit and margin using the following formula:
Profit = Average Selling Price - Product Cost - Shipping/Freight - Customs/Duties - Fulfillment Cost - Warehouse and Storage - Advertising - Returns
Margin Percent = (Profit/Selling Price) x 100
For example, if your average selling price is $28 per unit and your product cost is $4 per unit, your margin calculation might look like this:
Profit = $28 - $4 - $1.50 - [$4 * 0.15 = $0.60] - $7.50 - $0 - $5.60 - $0.35 = $8.45
Margin Percent = ($8.45/$28) x 100 = 30.2%
Generally, a margin above 25% is ideal, as it allows you some wiggle room to adjust your costs and prices. However, it's important to stay vigilant and regularly evaluate your margins, as changes in your pricing strategy or expenses can quickly erode your profitability.
In addition to calculating your margin, it's essential to consider what you can do to improve it. This might include negotiating with your supplier for future orders, identifying ways to reduce your largest cost, or changing the tariff classification to reduce the duty rate.
By understanding your margin and taking steps to improve it, you can ensure the long-term success of your business.