Calculate the profit margin of your products or services

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Do you know how to calculate the profit margin of your products or services? And why is it vital to do it correctly?
For any entrepreneur, knowing how to calculate the profit margin of your products or services is one of the most important principles for success, since it helps in assigning the right price to the products. If the calculation of this margin is done correctly, the company will receive the net profits stipulated in the financial plan; on the other hand, if the calculation is not done correctly, it is likely that losses will occur in the company without even realizing it.

While it is true that the profit margin is a widely used concept, the lack of a clear definition of it leads to many errors when performing the calculation. Let's say that, broadly speaking, the profit ecuador number dataset is the difference between the sales price of the product or service minus the fixed and variable costs.

Why is it essential to know the profit margin?
It helps us know the percentage of profit that we will have for each unit of the product or service sold.
It helps us with the replenishment of resources, since it provides information on the feasibility of being able to reduce costs to make the business more profitable.
Likewise, it helps us with the return on investment metric, since the profit margin is very helpful in knowing the average time in which the initial investment will be recovered.
It will also allow us to properly direct marketing and advertising strategies, as it will outline the number of units that must be sold in order to keep the company profitable, as well as the maximum discount percentage that can be used in a specific promotion.


Types of profit margin
Gross profit margin
Gross profit is the difference between total revenues minus production costs. This profit margin is expressed using the following formula:

Gross Profit = Total Sales – Cost of Goods Sold

When we talk about gross profit, we only include the direct costs of the product. For example, if the product is a cake, the costs could be flour, eggs, salt, sugar, butter, etc. Likewise, some costs inherent to manufacturing are included, such as the salaries of the bakers, packaging costs, as well as the gas used to bake the cake.

Continuing with this same example, if we assume that there is income of S/20.00 for each cake and the costs of the merchandise sold are S/12.50, this means that the gross profit will be S/7.50. This estimate can be converted into a percentage simply by multiplying by 100 using the following formula: