Do you know which of your products and services are most profitable for your business? If the answer is no, you need to learn to calculate and manage your margins. Margin matters because if it’s positive, it means you’re adding value to the business – a.k.a. – profits. If it’s zero, it means you’re not profitable. AND, if it’s negative, that means you’ll be out of business pretty darn fast.
You don’t need to be a math genius to calculate your gross margin. Simply determine the price of each unit of your product or service and subtract the costs to produce each. The result is your gross margin.
Let’s say I’m the producer of a premium chocolate bar (Yummmm). My customers are willing to pay $3.00 per bar and it costs me $1.50 to produce it. That means each chocolate bar I produce adds $1.50 of gross margin to my pocket.
Price = $3.00
Cost = $1.50
Gross Margin = Price – Cost = $1.50
I know what you’re thinking…..but what about taxes and rent and accounting fees and and and. Yes those things matter to your overall business and will certainly reduce your net margin for the business. But, start with understanding your gross margin first. Only then will you know which of your products or services contributes the greatest to your profitability and that you can sell more of.
Two Ways to Grow Margin
There are only two ways to grow your margin:
- Reduce your costs. Note, however, that if you do this and reduce your quality, your customers will notice and could take their business elsewhere.
- Increase your price. Note, however, that customers are not willing to pay more unless they perceive there is value for the higher price. So, determine what your value proposition is and test out various price points prior to going into the market. Otherwise you’ll just irritate your existing customer base and won’t attract new ones.
Photo credit parttimewebeneur.com
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