There are many facets of running a business to consider whether you’re an established business owner, a start-up, or an entrepreneur. When you don’t understand how these facets work, they can have a devastating effect on your profit margin.
Misunderstanding pricing
If, for instance, you want to calculate a 35% profit margin, you have to use the inverse to determine a correct calculation. To do this, you simply take your desired profit margin and subtract than number from 1.
1 – 0.35 = 0.65
This means if you want to determine the correct pricing of a $175 product, you should divide that number by 0.65.
175 ÷ 0.65 = 269.23
Miscalculating your profit margin will lead to under-pricing and profit loss.
Discounting too much
The general belief is that discounting prices will lead to more sales, and while it can increase sales, but it can still destroy your profit margin. Think about it this way, even if you discount your prices by 10%, you still have to sell 50% more products just to break even.
Sometimes discounting is not the answer. However, if you add more value to your product than your competition, you can INCREASE your pricing. Increased value attracts more clients, and your increased pricing will build your profit.
Increases from suppliers
You must keep annual price increases from all your suppliers in mind, when working out your own price increases. It is important to work these increases into your own profit margin so that your business doesn’t suffer any losses. If you’ve always ignored supplier increases, now is the time to start keeping an eye on them.
Warranty & Returns
If you start noticing a lot of your products coming back for replacements or refunds, you need to start checking up on defects from your suppliers or internal process breakdowns. Returns have an effect on your bottom line because it increases material costs.
Scrap
Scrap has the same cost impact as returns and replacements.
Excess Inventory
It is essential not to overproduce because you believe you will sell a certain number of products. Excess inventory will impact your bottom-line as well. Your expenses remain the same, but your income will have lessened because your expected sales haven’t been reached.
All of the above just reiterates that you much monitor all costs, no matter how small they may seem, to ensure that your profit margin remains intact.
My name is Allan Hirsh, and I am the author of 45-Minute Breakthroughs. Contact me today for more information on how you can grow your revenue in 2022: https://ahaonlinelearning.com/#contact