Your Profit Margin is Critical to Your Business Sustainability

If your business is struggling and you think all you need is more revenue, you might want to take a closer look. Sometimes more revenue is exactly what you don’t need. If your profit margin is too low, you may be digging yourself into a deeper hole with every new dollar of revenue.

Consider this:

You’ve got a retail business, selling your products online. Your average margin is 25%. With your average cart value of $75,  you’re making a gross profit of approximately $18.75 for every sale.

While you may be covering your shipping costs with a shipping fee, you will still have variable costs associated with every order. Someone will need to package the order, you’ll need someone to answer customer calls, you’ll have related accounting transactions to track, and you’ll have returns to process.

As your sales volume increases, your administrative costs will also increase. If you’re not making enough margin on each sale, you may not have what you need to cover those costs. With every additional sale, you may actually be causing your business to lose money.

If you increase your revenue, with inadequate margins, you’re going to cause your business to struggle. You may even grow it to the point of failure. When you’re looking to set your prices, consider the following:

• First, ensure you are charging enough to cover the cost of product.
• Next, evaluate your variable costs and ensure you’re charging enough to cover those costs.
• Then, determine what your net profit margin goal is – you are in business to make a profit, after all! Increase your price to get you to your goal.

There are other factors to consider when pricing your products, including your market, your customers, and your brand awareness. But, the first step is to make sure your gross margin is sufficient to cover your costs and you’re not driving your business into the ground with every additional dollar of revenue.