If you’re an online seller it is essential that you know your profit margin. This is what determines the success of your business and in the end how much you will earn. But many find it difficult to calculate their margin are not even sure what margin they should be aiming for.
The first thing you have to do is take a look at your gross margin. This is quite simple as it’s simply the difference between what you purchased the product for and what you sell it for. This calculation doesn’t take any of your other costs into account.
Let’s look at an example from iwoca picks:
Rob, an eBay seller sells Laser Bicycle Safety Lights. He buys 2000 units for £9280, which is £4.64 per unit. He sells them for £10.99 a piece. This means his gross margin is almost 58%. Most sellers should try to reach a gross margin of over 50%.
Rob also needs to look at his operating costs. That means things like:
eBay Fees (40p listing fee for most items + 10% of sales price)
PayPal Fees (Up to 3.4% + 20p per item)
Postage and Packaging – unless paid for the by customer
VAT (for VAT Registered Businesses)
Other Overheads (Phone, Insurance, Financing…)
The above iwoca pick shows that once we take these costs into account Rob is left with a 34% net margin. That means a total profit of £7640 if he sells all 2000 bicycle lights. Nice!
As competition between online businesses becomes more and more intense, buyers are getting more and more price sensitive. Sometimes sellers will have to sacrifice margins just to stay competitive. This is why it is so important that you know your margins as that’s the only way you’ll know exactly how much you can lower your prices before your business starts losing out.
If you can see that your margin is down due to strong competition, try to lower your operating costs. Explore cheaper postage options and make sure that you are actually getting the best deal possible from your supplier. Shopping is a good idea because there’s no point being in business unless you are making money.