Profit margin is one of the top elements to consider when measuring the efficiency of a business. It’s not a very complex calculation, yet it is still an extremely important indicator of your true profitability.
A simple formula for calculating profit margin is to subtract the cost of your inventory from your retail sales. However, this basic calculation does not always provide a true picture of how healthy your profit margins are. Other important factors to take into consideration include marketing and advertising costs, as well as expenses related to human resources.
It can be easy to overlook these factors as they relate to calculating your company’s sales and profit margins. Therefore, we have listed the top four elements you’ll want to pay close attention to when determining if a specific product is profitable for your organization.
1. Paid Marketing Expenses
Your paid marketing expenses will include costs for activities like Google Adwords and direct mailing. Unless you are conducting an advertising campaign for a specific product or service, you will need to account for these ad expenses across all of your products.
This is important because what you pay each month to cover your marketing overhead will cut into your gross profit margins. If you’re able to better understand what these expenses are, then you’ll be able to determine exactly what it is you’re spending to sell a product. After some research, you may find that for some products, what you’re spending to market these units isn’t worth the actual expense to maintain the inventory.
2. The Cost of Associated Content Marketing
If your company has a blog page or uses native advertising or social media marketing as part of its marketing plan, you should understand how these expenses affect your budget. Content marketing can account for a significant portion of your budget when you consider factors like content development, creation, and placement. These elements are applied to a specific product or an entire product line.
3. Costs for Labor and Maintaining your Brick and Mortar
Have you ever considered what the costs are to pay all of the employees who are involved in the selling process? What about the commission for your sales staff, and the people you hired as managers and supervisors to help navigate the process? And let’s not forget about the money you have to shell out each month to cover the costs associated with your storefront.
Each of these expenses is factored in when calculating the actual profit margin. Sometimes people figure these expenses by computing on the basis of per-product costs, as well as the totals for the entire business. This helps provide a much more accurate assessment of how effective your current sales methods are.
4. Your Business’s Indirect Selling Costs
There are other costs to consider outside of your marketing, labor, and expenses related to your retail location. Your indirect costs should also be added to your profit margin calculation for your product. Indirect costs could include your follow-up as part of maintaining good customer service, shipping expenses, and the costs associated with replacing products.
You will want to factor in as many costs as possible to understand if your current profit margin is sustainable long-term. The last thing your business needs is for a poorly performing product to end up costing more than it’s worth.
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