When you own a small business, you likely try to make as many sales or earn as many clients as possible. Growing your sales is a great way to increase your earnings. But it’s also important to ensure you earn enough from each sale. Your business’s profitability is integral to its success. But how much profit should you make on a product?
This guide will discuss how much profit you should make on a product, including:
- Why profit is important
- How much profit you should make
- How to track your business’s profitability
Why profit is important
Profit is the amount of money you earn from business sales after subtracting the expenses or production costs. Your gross profit helps determine how much you earn from each product sale. Profits are essential to track because they help determine sales targets to maximise your business profitability.
If your business is not profitable enough, you will struggle to cover operating expenses and grow. Ultimately, low profitability hurts your cash flow and leads to poor business performance. Even with a sufficient number of clients, you won’t earn enough to support your business if you charge too little for your products.
Aside from this, proving you earn enough profit shows investors and loan distributors how strong your business is. So, substantial profits will keep your business running and help it grow over time.
How much profit your should make off products
Knowing how much profit you should make on a product will help you earn enough for your business to succeed.
The profit margin
Your product’s profit margin helps you determine how much money you earn from each sale. Typically you’ll add at least a 10% profit margin to your production costs to determine a price. So you’ll need to understand how much it costs to create and sell your products to find the right margin.
But the right profit margin varies depending on your industry, product demand, and production. For example, if a product is popular or rare, it may have a higher margin because it’s difficult to find. Also, if your business is new, you may want to increase profit margins to cover startup costs and help you earn money more quickly.
Keep in mind that if you offer a discount on first-time buyers or promote sales, you will earn less profit from each sale. So when you do offer discounts, calculate the profitability of that discount to see how many products you’ll need to sell for the discount to be worth it.
How to track your business profitability
To understand how much profit you should make on a product, you’ll first need to assess the cost of running your business and how much profit you currently have.
Tracking you profits
You’ll need to closely track what you earn and spend to know how profitable your business is and if you need to alter your prices. This requires strong financial organisation. With updated financial records and your profit and loss statement, you can understand how much you spend on production compared to how much you earn from sales.
Set your prices for success
To determine the best prices for your products, add how much it costs for you to make and sell each product. Then look at the market to understand the typical pricing range. If the market is in high demand, you can increase your prices to earn more per sale. This research can help you set profitable yet competitive prices that help your business grow.
Say you sell cupcakes. First, calculate how much it costs to bake a batch of cupcakes and divide that by the number of cupcakes per batch. If it costs you £1 to make each cupcake, you may want to charge at least £1.10 per cupcake to earn a 10% margin. But, say you look at other cupcake shops in the area and notice slightly higher average pricing. This trend means you can charge a higher margin. If you charge £1.50 per cupcake, you earn a 50% profit from each sale.
Understanding sales goals
Once you set your prices, you can determine the profit you retain from each purchase. This knowledge will help you decide your sales goals. With the right goals, you can earn enough to support your business.
These goals may differ depending on the price range of your products. If you sell products with low production costs and low profits, you may need to sell more despite the margins. On the other hand, if you sell products that are worth a lot, you may earn more money with the same margin percentage.
For example, selling cupcakes earn you less than £1 per sale, whereas selling more expensive products like high-end furniture, you may earn over £100 in profit per sale. As a result, you would set much higher sales targets for cupcakes each year than for furniture.
Track your profits with the Countingup app
To stay on top of your profits, you’ll need strong financial organisation. But, financial management can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier.
Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are.
You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!
Find out more here.