Home – New Forums Other discussions Add profit margin before or after costs?

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  • #975835
    dangaff
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    G’day all,

    Bit of a stupid question and I’m pretty sure I know the answer but I thought I’d clarify as my brain has turned to mush.

    Basically do you add your say 30% profit margin after costs/shipping or just to product cost price?

    EG –
    Product cost = $10
    Shipping = $5
    Total cost = $15

    Would you add 30% of 15 or 10?

    Thanks,
    Dan

    #1076754
    The Infotainer
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    add it to the total cost of getting it into your shop

    a product may cost $10, and cost $5 to get into your shop, it might cost $4 for packaging, and therefore it costs you $19 and then you add whatever you think is appropriate.

    when selling you if you add 30% making 19 — $24.7 that is your price

    then you would sell this product and (if online for example) you add postage costs to send it to the end consumer, or if you sell at a high rate you might have free postage (depends what your selling and for how much)

    so a $19 cost price becoming $24.7 + postage (express post $11) would be total of $35.7 to get into the customers hands (for online type products)

    different products would naturally have a different percentage- hard to get 1 of a kind might be higher than 30% you would also add the tax to the cost price of the product

    other addons to the cost price is

    a percentage of your electricity bills for example, shop rent, web domain renting prices, advertising

    you figure out what it costs to run your business and then this forms your cost price for products (or rather a percentage of it)

    #1076755
    MyGreatIdea
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    As Info mentioned, we also add 15% to cover our running costs – insurance, licenses, advertising etc – different percentage depending on your operating expenses of course.

    So, from the factory cost of $10 + shipping $5 = landed to your door $15.
    Then add your markup (30% you said?) + running costs (yours might only be 5%) + 10% GST = retail price. Then either add postage/delivery or have it included.

    Wendy :)

    #1076756
    Shaukat Adam Khalid
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    dont make the mistake of pricing your product or service based on costs. you will struggle forever.

    look around you, the most profitable businesses sell based on value. look at bagged cabbage, premade salad and even nandos.

    if you have to for the short term, add your margin on your total cost but that’s just setting up for a tough road ahead.

    if you don’t know how to price based on value, look up dan kennedy’s no BS price strategy on amazon. you wont regret it.

    #1076757
    MyGreatIdea
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    hymstrategies, post: 96885 wrote:
    dont make the mistake of pricing your product or service based on costs. you will struggle forever.

    True, but you need a starting point. You must know what your minimum selling price is to be able to cover your operating expenses. And work from there.

    Wendy :)

    #1076758
    themot
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    Couple It, post: 96888 wrote:
    True, but you need a starting point. You must know what your minimum selling price is to be able to cover your operating expenses. And work from there.

    Wendy :)

    Not really, You need to understand the value first, otherwise the percentage you add may be higher than what the market will accept which would make the business unviable from the get go.

    #1076759
    MyGreatIdea
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    Sorry, I’m not making myself clear 😮

    You must know your minimum selling price to cover your operating expenses regardless of what you decide your markup should be, and regardless of what value the market places on your product.

    This is a starting point. Then you look to see if the market will support the markup you are looking for.

    Wendy :)

    #1076760
    James Millar
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    themot and couple it – my advice would be that both price points are pretty critical to analyze at feasibility stage. You need to know support in the market for the average current price, your goal price (which is dependent on some USP that you deliver. Ideally a premium to market average) and the break even price. Stress test at all levels and produce a model range accordingly.

    I think the most important thing here is to undertake this modelling and analysis BEFORE MAKING THE DECISION TO PROCEED. If the model doesn’t look likely to provide everything you want (financial and non financial ROI) then don’t blindly proceed.

    Dan I’m not suggesting that you haven’t undertaken pre startup feasibility. Generally though – this is an issue that we are seeing more and more of.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1076761
    yourvirtualboard
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    James, you’re seeing feasibility studies being done before start up, particularly micro / sme? For me that would be pretty rare. With the only requirement to start a business being an ABN, most just jump in and work it out from there with some making it but many giving up.

    Be an interesting poll – how many did a feasibility study before start up and by feasibility I mean more than a few scribbled notes on some paper. I mean getting clear on;

      business model
      customer segments
      value propositions / competitive advantage
      channels to market
      revenue streams
      key resources (facilities & people)
      key activities
      cost structure
      capital / funding
    #1076762
    James Millar
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    Harry unfortunately you are right – the vast minority of startups that come to us are looking for assistance in making a objective and fully informed assessment before seriously committing (probably less than 20%. Perhaps not rare but certainly not common). We see plenty that are seeking clarification, refinement of modeling, structural advice, entity setup etc but most have already decided in their hearts they are going ahead irrespective of what we provide. It’s probably worth noting that we don’t typically advise any client straight out that they should not proceed. We try and let the numbers dictate the direction or work up some alternative strategies for the same concept.

    Equally concerning is that at least half of those that don’t seek professional advice don’t undertake their own pre assessment to an acceptable standard to allow them to make an objective decision on whether to proceed. So this category basically proceeds blindly into the abyss and more often than not blow their money. It’s wasteful and hopefully we can encourage a few people here not to make this mistake.

    On a positive note though, there are certainly those that undertake their own feasibility assessment (pre commitment) to an acceptably high standard to make an informed decision on whether to proceed (based on forecast ROI etc). Probably around half at our firm.

    Keep in mind this is based on our firms experience only and different advisors have different stats. Advisors that deal with lots of sole proprietors and micro’s etc may have a different demographic which skews their stats to show a lesser advisor participation (perhaps where the business owners are less informed, less resourced or the firm doesn’t have an appropriate advisor solution). Alternatively at the big four, investment funds etc, they exclusively deal with exceptionally capable and well-resourced entrepreneurs where without exception they undertake extensive pre-startup assessment. We have a pretty broad mix across that spectrum so our stats are based on that.

    Helping build better businesses and better lives with expert financial and taxation advice. info@360partners.com.au www.360partners.com.au 03 9005 4900
    #1076763
    yourvirtualboard
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    It’s the old “you don’t know what you don’t know” and I did segment micro / sme. I generally don’t deal with solo / micro on a consulting level – usually a combination of cash and perceived need. However with only difference in small vs. big business being scale, and the small business owner having less support for the same issues, they are ironically, often, most in need.

    So many people have this romantic notion of running their own business and the pre assessment is very subjective with limited business know how, of course they go ahead – it’s a heart decision. I put the online program together for the solo / micro and it never fails to deliver the same “I had no idea” comments on many areas once people have been through it.

    I’m a firm believer that a business is capped by the owner’s acumen and if this is light to start – it’s all uphill form day one. I also believe before an ABN is handed out some basic business course should be completed and passed – would save so many from making an ill informed decision and better equip those that do go ahead.

    #1076764
    The Infotainer
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    I didn’t do any study when I first started, but I did have a normal job, so I was to learn as I went.

    for my new magic shop the only thing I saw was that in 1.5 years I had a database of 2000 enquiries and thought – gee’s I know their birthday, so I can set up an automated email to target their birthday and Xmas and sell birthday party magic sets

    that was the idea and not really any study other than looking at other magic shops around Australia to see what they sell- which is not much,

    No study for trade show magic
    no study for corporate magic but did learn in the first 3 years when I had the normal job

    #1076765
    dangaff
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    Thanks alot everyone for the extremely in depth discussion. I enjoy reading and learning anything got to do with business and new knowledge that may lead to increased sales etc.

    I’ll be getting that book no doubt!

    Thanks alot
    Dan

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