Are You Calculating Your Sales Margins Correctly?
Offering goods and services for profit is no new concept. Even as far back as 3,000 years ago, currency, or some form of it, was used in exchange for varying products and services. Over the years, with the advancements in technology and advertising practices, determining sales margins have now extended far beyond the raw materials and manufacturing costs to make a single sale.
Today, the considerations for sales margins are substantial, making it common practice for businesses to overlook key variables when doing their sales margin analysis. These usually include:
Secondary selling costs
The cost of selling a product does not stop adding up once a product is sold. The indirect selling costs which contribute to your sales margin include any replacements costs, returns, shipping, follow-up feedback, etc. Business owners have to understand that there is always a possibility that customers may return an item or request a refund – and these all add to your costs.
If you have a marketing team pushing out content to heighten engagement for your brand – you should be using this variable in your sales margin. Traditional forms of advertising, social media marketing, Search Engine Optimization (SEO), as well as any other measures used on your website to push traffic organically are all implemented to make a sale.
The combination of your paid marketing costs, including organic and Pay-per-click (PPC), are all considered a part of your sales margin equation. With PPC, you can see which product campaigns are driving the most sales, giving you a clearer idea of which products or services are moving quick, and which ones aren’t worth offering anymore. Depending on the market, a substantially low sales margin usually indicates that selling a particular product or service isn’t profitable.
Who’s selling? If you’re running an actual physical retail store, you must consider the overhead costs of running that space and employing the people in it to make that final sale. Are you commission-based? These are factors that will dip into your sales margin. It is possible to generate a price per-product total based on your daily operation expenses, employees on the floor, etc.
As you can see, there are many factors that will cut into your gross profit margins that go well beyond raw materials and manufacturing. Tobin & Collins understands the complexities that come with successfully running a business. Contact Tobin & Collins to help get your financial picture as perfect as can be!