Understanding Your Product Margins as a Business Owner

As a business owner, you need to understand your margins on all the products and services that you sell. Knowing your margins helps give you an understanding of how much money you can spend on other areas of your business and what type of products or services you should invest in that will help increase your profits. Let's discuss what a product margin is and the best ways to calculate it.

What Is a Profit Margin?

A profit margin is the amount of money left over after all expenses are paid. It’s also known as "net profit" or "gross profit". A good profit margin is one that provides enough funds to reinvest back into the business, pay employees, and cover overhead costs like rent and utilities. Depending on your industry, an acceptable profit margin can range from 6-20%.

How to Calculate It?

In order to understand your margins for the products and services that you sell, there are three things you need:

  1. gross profit (the total revenue minus cost of goods sold)

  2. operating profit (the total revenue minus operating expenses)

  3. net income (the total revenue minus all expenses)

To calculate these yourself, here are the standard formulas:

  • Gross Profit Margin = Gross Profit / Revenue x 100

  • Operating Profit Margin = Operating Profit / Revenue x 100

  • Net Profit Margin = Net Income / Revenue x 100.

If math isn't your strong suit, no worries! There are plenty of free calculators available online such as The Omni Calculator, Calculator Soup, The Calculator Site, BKL Oberlo Shopify Bidwells NCalculators Bankrate etc., which provide easy-to-use tools to calculate these figures for you.

As a business owner it's important to have an understanding of your product margins so that you can make decisions about pricing strategies as well as investments in new products or services that will help increase profits. Knowing how to calculate these figures is key but if math isn't your thing then there are plenty of free online calculators available to help make this process easier for you. Comment below with any questions that you have about calculating product margins for small businesses!