Why It’s Important to Work Out Your Expected Profit Margins
When beginning an eCommerce business, it’s important to know how much you’re making and how much you’re expecting to make so you can ensure you’re on the right track and evaluate how well your business is doing overall. Knowing your profit margins indicates where you are with your business and allows you to set yourself S.M.A.R.T. goals. Setting goals lets you see the bigger picture of your business and focus on what you’re working towards.
Knowing your expected profit margins allows you to budget what you spend so you don’t overspend. If you’re expecting a high profit margin you can afford to spend more money on production, marketing, advertising, branding etc… in order to improve your business further.
Profit margins are an important factor to keep in mind when running your business. If you have a particularly low expected profit margin, that may be an indication that you need to change some aspects of your business or that you need to consider lowering costs where you can in the production, storing or marketing of your products. In order to generate more profit you need a good profit margin.
How to Estimate Your Expected eCommerce Profit Margins
Estimating your profit margins is fairly straightforward. Simply take your net income, divide that by your revenue and multiply that number by 100. A simple equation but one that can give you a helpful insight into how well your business is achieving.
(Net income / revenue) x100 = profit margin
Determine Your Net Income
Your net income is the amount of money you’re left with when you subtract your total expenses from your revenue. Expenses will include producing, storing and shipping the product. As well as marketing and advertising. Your net income will be higher if your total expenses are much lower than your revenue. For example, if you spend £80,000 on your product but make a total of £120,000 from sales, your net income would be £40,000.
If you’re looking to increase your net income, consider where you can cut costs in the production and advertising of your products whilst also increasing or maintaining your sales.
Divide Your Net Income by Your Revenue
The next step to working out your profit margin is dividing your net income by your revenue. Using the example above, this would mean taking £40,000 and dividing it by £120,000. In this case that would be 0.33.
Multiply the Results by 100
To make your result a percentage, take the 0.33 you just calculated and multiply that by 100. In this example, the results would be 33%.
The profit margin for this business would be 33%. This company keeps 33% of its earnings after paying out for any and all expenses in the process of producing, shipping and marketing their products.
What’s Your Expected Profit Margin?
So now you know how to calculate your expected profit margin, what’s yours? If you calculated a high number or the number you were hoping for, then that’s great! Your business is on track to reaching your S.M.A.R.T. goals, making money and thriving in your industry. If you were disappointed by the results of your expected profit margin, or they were lower than you expected then it’s not the end just yet, we can help! Here at Xune we can give you a helping hand to get you back on track and achieve the expected profit margin and booming business you are aiming for.