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robdamel's avatar

What is considered to be a good profit margin?

Asked by robdamel (786 points ) October 10th, 2011

What percentage is considered to be a good profit margin? Say, spending 2.50 on a t-shirt and selling it for 15 dollars.

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11 Answers

GabrielsLamb's avatar

You have to factor in whatever component part goes into the actual production. Labor, materials, time, electricity, packaging, employee salary, rent, insurance.

You have to be more specific, is it just you, or is this a company?

robdamel's avatar

I dunno, I am just referring to cost of production and the profit of selling that item. The cost of production would include – Labor, materials, time, electricity, packaging, employee salary. So after deciding on cost of production and a selling price, what percentage would be considered an excellent profit margin?

GabrielsLamb's avatar

There is math that does that for you… Math, and economics, and I do not speak!

lillycoyote's avatar

Well, if it only costs you $2.50 to make each t-shirt and you are able to sell it for $15, that would be a 600% profit margin. That would be way beyond good. That’s an incredible profit margin compared to most industries.

robdamel's avatar

@lillycoyote
Really? I thought most things for sale had higher profit margins.

Not long ago here in Brazil, a very expensive brand name called Zara was discovered to have been paying 80 cents for the labor of each completed piece of clothing, then selling it for its average price of 160–190 reais. Now that however, is an incredible profit margin, of course, at the cost of slavery,

But yeah, I thought many other things had higher profits.

CWOTUS's avatar

You have to distinguish between “gross profit” and “net profit”. Saying that “you can make a shirt for $2.50 and sell it for $16.00” indicates a high gross profit, true. But that $2.50 probably doesn’t include the time spent designing the shirt, carrying inventory, commissions to sellers, your salary, debt service on the plant and inventory, etc. When all of the costs of making + marketing are included as “cost of goods sold” and subtracted from the final selling price, then you’ll have a net profit that is probably going to be a lot lower. (And if you have leftover inventory from unsold goods, returned goods, etc., then your margin is going lower still.)

CWOTUS's avatar

To answer your question “a good profit margin” is one that gives you (and others) incentives to stay in business and improve the business. It’s a subjective thing, and it varies from one industry to another.

Nullo's avatar

There’s also profit on bulk (individual sale) or volume (total sales), where the per-unit margin is low but you sell so much that you make up the difference. That’s Wal-Mart’s main gimmick.

Buttonstc's avatar

It’s a balancing act.

Very generally speaking it’s in the rough neighborhood of double or triple TOTAL actual costs in order to be doing well consistently.

Truthfully, it’s what the market will bear. If it’s a highly desirable item, most people will be willing to pay ten or more times the actual cost. It it’s a unique item and you’re the only one who has it, the sky is the limit (theoretically).

Just one example would be the fantastic financial success of Apple even tho there are tons of computers selling for significantly less. Not everyone is willing to pay Apple-type prices but enough people certainly are. Enough to keep them more than just viable, financially speaking.

In addition to desirability there is also quality. If I’m buying a T-shirt at a festival or store, I’m certainly willing to pay much more for a Hanes or Fruit of the Loom as opposed to a cheaper flimsier one which will be all stretched out or shredded after a few washings.

It’s really difficult to generalize with so many variables and so little specificity.

I’ve been to numerous trade shows and done vending at street fairs as well as a holiday merch cart at a Mall. The wholesale sellers at trade shows are generally aiming to handle products which can most easily be sold at retail for 2–3 X the wholesale price.

But they also have to factor into the pricing structure to provide volume discounts for retailers, thus lowering the per item cost even further.

Like I said, it’s all a balancing act and dependent upon what the market will bear (and which market you’re talking about).

This is but one of the many reasons why getting an MBA from Wharton comes in really handy :). Retailing can be a headache-inducing field. I dabbled in it a bit but decided it’s not what I wanted to do for a living.

Just give me a roomful of screaming jumping elementary kids and I’ll have them squared away and straightened out in no time. Much rather do that than deal with making a living from retail sales.

But that’s just me. Other people love the challenge of buying and selling and would get an instant migraine from a classroom full of kids. Go figure.

:D

robdamel's avatar

@Buttonstc Haha nice post

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