Increase your profits today by determining the right selling prices for your products.
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Profit margin is simply a measure of a business’s profitability. There are four different types of profit margins: gross profit, operating profit, pre-tax profit, and net profit.
Net profit margin is the amount of money a business makes after deducting all costs and expenses.
Here’s the formula for calculating net profit margin…
Net Profit / Net Revenue = Net Profit Margin %
Example: $500 / $1,000 = 50% Net Profit Margin
In this example, our net profit is $500 and our net revenue is $1,000. This means that our net profit margin is 50%.
Gross profit margin is the amount of money a business makes after deducting the cost of the goods sold (COGS).
The formula for calculating gross profit is very simple…
(Net Sales - COGS) / Net Sales = Gross Profit Margin %
Example: ($500 - $200)/ $500 = 60% Gross Profit Margin
In this example, our net sales are $500 and the cost of our products was $200. Our gross profit margin, then, is 60%.
Operating profit margin is how much money a business makes on a dollar of sales (as a percentage) after paying for production costs but before paying interest or tax.
Here’s the formula for calculating operating profit margin…
Operating Income / Revenue = Operating Profit Margin %
Example: $1,000 / $2,000 = 50% Operating Profit Margin
In this example, our operating income is $1,000 and our revenue is $2,000, which means that we have an operating profit margin of 50%.
Pre-tax profit margin is how much money a business makes on a dollar of sales after paying for all expenses, but before deducting taxes.
Here’s the formula for calculating pre-tax profit margin…
Profit Before Tax / Net Sales = Pre-Tax Profit Margin %
Example: $1,000 / $10,000 = 10% Pre-Tax Profit Margin
In this example, we made $1,000 in pre-tax profit and our net sales were $10,000. This means that our pre-tax profit margin was 10%.
Our profit margin calculator is dead-simple to use. And it’s perfect for determining the ideal price of your products so that your business can remain profitable.
Just enter the costs of your products and/or other expenses (depending on which profit margin you’re trying to calculate) and then enter your markup percentage (i.e. how much more you’re selling your product for than it costs you to produce).
Hit “Calculate Profit” and we’ll show you your results!
Here’s an example.
If the cost of my product is $100 and I’m selling it for $150, then I would enter 100 into the “Cost Of Item” box and 50 (as a percentage) into the markup box, which would reveal a profit margin of 33.33%.
Typically, a 10% profit margin is acceptable and a 20% profit margin is very good. But the answer to this question really depends on your business model and the products you’re selling. As a rule of thumb, if you’re able to pay all expenses and still invest 5% to 10% of net profit back into your business, then you’re on the right track.
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