Your profit margin is a metric that determines how much revenue you are bringing in for your product relative to its cost to produce. It's usually calculated as a percentage - due to this, one of the great things about this particular metric is that it can be used to make comparisons across your entire product range.
For example, if you make $11 from Product A, and $5 from Product B you might think that Product A is your "better" product. However, if Product A has a profit margin of 22%, but Product B has a profit margin of 45% this completely changes the picture. Although your revenue may be higher for sales of Product A, it isn't necessarily your best performer overall - this is what the profit margin calculation is designed to highlight.
The formula to use to calculate your profit margin is as follows:
Let's go through the formula step by step:
To calculate your profit margin for a product, you'll start with the selling price of the product (Price). For a formula to calculate your ideal selling price, see our blog post here: How to set the right price for your handmade products
Now, you'll need to know your Base Cost - this is basically the total cost to you to create your product. To make your profit margin calculation more accurate, you can try to also include things like overheads, labor and seller fees into your base cost. More details on how to calculate your Base Manufacture Cost can be found here ».
Once you have these two numbers, you are ready to do some profit margin calculations! Subtract the base cost from the price - what you are left with here is your gross profit. This is the actual amount that you "take home" in profits after selling the product for this price.
Finally, divide the gross profit by your price to get your gross profit margin.
You can also use this same calculation to calculate your business profit margins. To do this, you'll want to add up all revenue from your products, tally up your expenses and apply the same margin formula:
One other thing to note is that your profit margin is not the same as your markup - they are calculated using different formulae and have very different usages. If you'd like to know more about the difference between margins and markups, please see our blog post here: Whats the difference between markup and profit margins? »