Hi friends- today we are talking about how to calculate gross margin and I am so excited! Why? It turns out so many people get started making product because they love the creative process. And they have no idea how they are actually going to make money.
Without having a very clear understanding of what your margins are, you won’t be able to plan out your financials and grow your business.
So first, what is your product margin?
In retail, your margin is the difference between your revenue (money you bring in for a product) and the cost of that product. Your gross margin is expressed as a percentage while your gross margin dollars are expressed as a dollar amount.
Since you’re a creative bunch, let’s take a look at a little picture that might help this make a bit more sense.
So why is margin important?
Ultimately, the higher your margins, the more money you are making but remember, not all of this money goes straight into your pocket.
You still have all of your other business expenses called SG&A (Selling, General and Administrative). This includes rent for your office space (or home office), phone, internet, business taxes, website hosting, web design services, oh yeah and salaries.
Remember, this is supposed to be a business that actually pays you money so don’t forget to factor in paying yourself. And, if you think you are paying yourself by factoring in some of your labour costs because you’re sewing your product yourself. That is NOT enough. Check out my post on home sewing to understand a little more about that.
Retail versus Wholesale Margins
Depending on the type of business you are running, you will need a certain amount of margin to operate. In general, retail businesses (that sell directly to their consumers through brick and mortar stores or online) have higher margins. They don’t have another business (a retail store that they are selling to) taking an additional profit on their product.
Think about it, if you’re selling wholesale, the store you are selling to is going to have to mark up the price to make some profit and pay their expenses too. Generally it is not the price that goes up when you sell to a wholesaler but your profits that go down.
So why would you ever wholesale your product instead of selling directly to your consumer? In the past, selling direct to consumer was expensive and a lot of work. You would either need to sign a long lease on a retail store of get some serious IT support to set up an online shop.
But, the world of retail is changing and you have incredible access to platforms that help you sell online. Check out my post on Five Ways To Sell Your Product Online for some great eCommerce options.
Even in brick and mortar there are new opportunities that don’t require the capital that it used to (pop ups!).
My recommendation would be to start out selling direct to consumer and keep those gross margin dollars for yourself.
It’s time to start calculating your gross margin!
Did this post give you a little more clarity about how to calculate gross margin and why it is important for your business? I’d love it if you shared it with a friend!
I’ve also added a quick tool to the Resource Library that helps you EASILY calculate your gross margin. Just enter your retail price and product cost and the work is done for you!
