Understanding Profit Margin

A lot of people have planned to venture into online sales, but only a few have successfully done it. Despite what many may think, selling online profitably is not just about building an online store.  Cost and markup are two of the most important concepts you need to learn before you sell online.

There are several types of costs associated with a business, some of the most common ones for retail include: cost of goods, CAPEX and OPEX.

Cost of goods is a common accounting term that covers all expenses related to the acquisition of the products you intend to sell online. If the goods are specifically manufactured for your company, it will include the cost of raw materials, labor and shipping from supplier. Here, product sourcing becomes a crucial management decision. Find the lowest possible cost of goods for the specific product you want to sell by shopping for a good source. You can get in touch with a whitebox supplier, you can have it made for you or you can choose dropshipping as an option.  All these options have their pros and their cons. For instance,  for dropshipping, it means being able to run your business without the need for storage, shipping and handling facilities. Some say this is a risky supply management technique, but the trick for successful use of dropshipping is to find a reliable supplier.

Opex or operating expenditure, are on-going costs generated by running a business or a system. These include electricity, rent, manpower.  Meanwhile, CAPEX or capital expenditure, refers to cost incurred for fixed assets. This can include purchase of equipment, licenses, buildings and property. Combined, the CAPEX and the OPEX are referred to as overhead cost.

The failure point in most businesses that sell products online is that they only look at the increasing revenues – or the total earnings out of the sales – without considering the cost it entails. Increasing revenue is not an indicator of an online store’s success.

Profit, on the other hand, is a different story. Profit margin or gross profit margin, is the ratio of the revenue to the gross profit. The margin reflects the difference between the revenue and the costs. In retail, we have what is known as the markup. The retailer bases this on a percentage of the cost to calculate the sales price that would earn the best margin. Essentially, markup and margin are two related terms calculated in different ways.  As an example, if the product you sell online costs  $5, with 100% markup, the selling price becomes $10. This means, that you get a 50% margin on the revenue.

Understanding your online store’s profit margin will help you determine how successful your business really is. It measures how much out of every dollar sold, you actually get to keep.

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