Ideal Profit Margin For Successful Business

Discussion in 'Growing and Managing a Business' started by Blahzay, Jun 25, 2013.

  1. Blahzay

    Blahzay
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    Hello, new to the forum but had a pretty straight forward question. I'm no where near where I need to be to actually open the business I have a been wanting to for a while but I have a question.

    What is the ideal profit margin for at item that is purchased at a wholesale price of $15-$17 each? In order for me to be competitive with other niches in my area I would basically have to sell between $23.99 to $27.99 + tax. Saying I can sell at least 30-50 of these items per day. Would that profit margin be worth a brick and mortar? Eventually I would like to expand into different items to add to the store but as a starting point this is what I would be looking at as a rough estimate. With past research, my monthly bills with everything included to keep my doors open would be roughly $800-$1000. I was planning on opening Mon-Sat but may just to a 7 day a week thing just to test the waters.
     
  2. Fergal

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    Welcome to Business Advice Forum, thanks for joining and posting your business questions.

    When thinking about your profit margins, I'd suggest that you think in terms of what your potential customers are prepared to pay for whatever it is your selling. Customers are not concerned about your costs, so having high costs won't mean that you can charge high prices.

    Once you have worked out what you feel you can charge to your customers, then look at your potential costs and estimate whether or not you believe your business will be successful. You will also want to estimate what your break even selling volume will be. You calculate this as follows;

    Break even volume = Total Fixed Cost / (Price per unit - variable cost per unit).

    E.g. say your figures are as follows;

    Total Fixed Cost = $800 per month
    Selling price per unit = $24
    Variable cost per unit = $15

    Break even volume = $800 / ($24 - $15)
    Break even volume = $800 / $9
    Break even volume = 88.88 units per month, rounded up it's 89
    In this case you would have to sell 89 units per month just to break even.

    Does that help?
     
  3. Blahzay

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    Completely understand. With that profit margin and being that I would have to sell 89 pieces just to break even. What realistic goal would/should I shoot for to at least consider the business a success? 300-400 pieces per month?
     
  4. Rocky

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    What you should aim for as far as the sales are concerned depends on lot of things like the price you charge, your location and the kind of product you have. You cannot make perfect estimates unless you get into it. You should be more concerned about breaking even initially and later turn to profit and gradually increase it.

    And about the ideal profit margin you should remember one thing it should cover you cost of capital and must be more than the lending rate otherwise you would be better of earning interest on your capital than employing it in that business.
     
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  5. Aldo

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    Profit margin should be according to the approach of customer. It should reasonably affordable to the customers. you should reviewed your profit margin seeing al related factors.
     
  6. platnumcn

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    I don think that having an ideal amount in mind would be a good idea. Better it is to opt for a percentage profit of the item in consideration. If you do not save a minimum 20 percent, you will not have enough money to continue your business for long, provided you have a lot of money in your checking account to continue for a lengthy period of time.
     
  7. alicemenezes

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    Well, ideally I'd say about a 30- 40%..!!
     
  8. Ted

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    I can tell you from personal experiences in business that your costs will be more than you expect and your profit margins will be less than you expect right now. There are always unforeseen costs that raise your overhead when running a retail store.

    At a price point of less than $50 per unit sold, I would not want to sell any product that did not have a markup of at least 100% at bare minimum. In fact, I would want that product to have a 500% or higher margin ideally.

    If you look at the gross margins at the big box stores you will see that they are dealing with hundreds of percent and sometimes thousands of percent markup.

    Here is an example - Go look at how much USB cables cost wholesale. Anyone can buy them for a buck a piece. Look at how much the major retailers sell them for in their stores - $20 each. Do the math.

    Margins in retail stores should be very high when selling low priced items (items that cost less than $50 retail). At least that is my opinion.
     
  9. singhabhishek251

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    To calculate the margin, you need to have a look at the market in your surrounding and check for how much they are offering and you have to be according to that. If they are taking 500% margin, then you can also have some less than that or if they are taking 5%, then also, you need to adjust in that, whether you are making profit or not. If you are not making profit, then do not do that business.
    Price should be as your competitors not according to profit, if you want to be market.
     
  10. James Faulkner

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    Profit margin is the main thing in business that counts a lot for seller, because he looks for the profit margin and it is the the task of seller and more profit margin is possible only with the quality of products.
     
  11. AnushaJain

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    Profit margin is maximum in hotel business and petrol business.Actually the things which have become the necessity of human has the maximum profit margin,People can't live without food and petrol in the present scenario :p
     
  12. Fergal

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    That's certainly not the situation here in Ireland. Hotels are struggling at the moment and there have been quite a few high profile hotel closures. Do you have a reference for your statement or is it just based on your own opinion?
     
  13. JBMedia

    JBMedia
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    I would completely have to agree with Fergal on this one. Although I do agree petroleum and food profit margins are quite high these days, of course expecting you sell the items before expiration, hotels are slowly dwindling everywhere because of the economy. They are pushing their rates to extreme lows just to stay in business. Doesn't sound like a high profit margin to me.

    Back to the original topic. Understand that in the beginning of a business you generally don't come out on top. What I mean by this is, as also previously stated, you will generally go in the hole a bit and breaking even really should be your only concern at this point to continue to keep the business afloat. Generally speaking businesses, especially new/independently owned retail ones, don't start seeing real profits coming in until the end of the 5th or 6th quarter. This is being generous too. A lot of newly opened businesses don't even see noticeable profits until the second year. The main point here is, consider what you need to break even, and use that as your focus and starting point. If you continually just think about making profits in the beginning you'll stress yourself out over nothing and it could affect your business as a whole.

    Think of a business like a relationship. You don't just fall in love, you work at it and love is what becomes. Same with a business, you don't just start making out ridiculous profit turnovers, you work at it and profits is what becomes of it.

    Hope this helps a little bit, good luck with your endeavor.
     
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  14. shane

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    I agree with the other posters about at least breaking even as a bare minimum. There are other factors to consider, such as how easily someone else can come in and steal your customers (barriers to entry). Since your costs will likely be higher than you expect, and revenues possibly lower, the higher your potential margins the better chance you will have of surviving if any of your assumptions are wrong. Another thing to take into account is how much cash you have saved up to live off while the business picks up. As the owner you will be paying everyone else (vendors, creditors, employees, etc) before you pay yourself so you will need to plan accordingly.
     
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