Business isn’t nearly as complicated as most people think. Let’s walk through a straightforward example which illustrates how to find the profit margin of your wholesale product. We’ll use the easy example of assembling a bike.
1. Determine the General Market Price
Your first step is to determine what the potential market price is for your product. What are similar products selling on the shelf for? Your product may have different features or a different appeal, so the price may not be exactly the same, but it’s a good place to start.
If a typical bike is selling for $100 but your design has a unique (but not industry-changing) design, then yours may sell for $120 or so.
2. Determine Your Cost for Material
Next, figure out how much your material costs are for each unit of product. How much does it cost, material-wise, to go from a bin of loose parts to a finished product, ready to be shipped to the retailer?
In our example, you would need to know the cost of all the screws, nuts, bolts, wheels, frame, seat, etc. for each bike - including waste. Don’t forget the cost of packaging.
For easy math, let’s say it cost $25 to buy the parts to assemble each bike.
3. Determine Your Cost of Labor
How much did it cost you to pay someone to assemble the bike? This doesn’t include the salaried supervisor, the light bill, or the cost for catering lunch - just the direct labor cost of assembling the bike.
If one worker is paid $30 an hour and can assemble 2 bikes an hour, then it just costs $15 to assemble the bike.
As of now, we know our bike costs at least $25 in material and $15 in labor - at least $40 altogether.
4. Determine Your Indirect (overhead) Costs
Now that we know how much it directly costs to assemble a bike, let’s figure our indirect costs. These are expenses associated with running the business but not directly involved in producing the product. Employees not directly involved in the assembly, utilities and rent, light bulbs, health insurance, advertising, coffee for the planning meeting - these are all costs which have to be accounted for but aren’t directly part of assembling a bike.
Here’s an easy method - add all your indirect costs for a month, then divide by the number of units you produced. Let’s say your bike assembly company had $100,000 in overhead costs but assembled 10,000 bikes. That means it takes another $10 per bike to cover all the rest of your expenses in your company on top of the cost of directly assembling the bike.
Now, $25 material costs + $15 labor costs + $10 indirect costs = $50 total cost. This means you have to sell each bike for $50 just to break-even in your company.
5. Work Backwards to Find Your Profit Margin
You can estimate retailers will mark your product up by at least 100%. If your bike will sell for $120 on their shelves, you might settle on a price to them of $60.
So now you know it costs you $50 to manufacture the bike, and you’re going to sell it for $60 to the retailer. You’ll make $10 per bike.
Your profit margin is the total profit divided by the total cost. In this case, $10 divided by $50, or 20% per bike. Not bad!