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Markup / Gross Profit / How to Price Your Goods

Discussion in 'Business News & Resources' started by Pete, Nov 22, 2008.

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  1. Pete

    Pete

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    There is quite a bit of confusion among many new to business between several terms, all related to how much is made on a sale.

    I prefer, as do most businesses to use Gross Profit as the measure to use when deciding how to price a product.

    Gross Profit is the Percentage of the Selling Price that is Profit.

    Example: Cost is 1.00. To make a 50% Gross Profit you sell the item for $ 2.00. This give you a profit of 50% or half, of what the product sold for.

    Many people confuse that with Markup.

    The Mark-up on that same item is 100%. You take the cost of 1.00 and add to it 100% of the cost or another 1.00, giving you a Markup of 100%.

    You can never have a Gross Profit of 100%, unless you have no cost at all in the item. If you pick a rock up from the ground and sell it, you have 100% Gross Profit. But if you have a cost of even 0.01 and sell for 1000.00 you still have not made a true 100% Gross Profit.

    You can have a Markup of 200%, 250%, 500%. Since Markup is based on cost, anything is possible.

    Bookkeepers, accountants and taxmen use Gross Profit.

    How much did you pay?
    How much did you sell it for?
    Pay tax on the difference.

    Not quite that simple, as you can deduct expenses, but those are the basic figures from which all the others flow.

    To determine Gross Profit after the fact, you divide the amount of profit from the sale by the sales price.

    You sell something for 3.00. Your profit is 2.00. You divide 2 by 3 and get .667. Your Gross Profit was 66.7%. Yes, you divide the small amount by the large amount and always get less than one as a result. This is your percentage of profit.

    With Gross Profit in mind, here is a list of Factors you can use to determine at what price to sell your goods.

    I strongly suggest you use "Landed Costs". Traditionally, this has been a term applied to imported goods, which means the cost to actually put the goods on the warehouse shelves. But, in current usage, it simply means including shipping into the cost of any products you purchase. If you pay mail, or delivery fees of any sort, include that cost when calculating your profits.

    Here is the table:

    To Make / Multiply your cost by

    10% / 1.11
    15% / 1.18
    20% / 1.25
    25% / 1.33
    30% / 1.43
    33% / 1.50
    35% / 1.55
    40% / 1.67
    45% / 1.82
    50% / 2.00
    60% / 2.50

    And you can use figures in between. I use 1.15 in my dropship pricing. That gives me about 10% after I allow 3% for PayPal.

    Not a great markup, but the volume makes up for it. And I never see the or touch the goods. I certainly don't suggest everyone work on that, but it gives me a bit of pocket change each week. :)
    .
    beads likes this.
  2. rssales

    rssales

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    That's a handy guide, they way I calculate things I'm going to look at for profit is;

    Original Cost + Delivery + Ebay/Shop Fee's

    If that then equals or is higher than the average price for items that are sold of its type, I scrap the idea.

    If it is a lower value than the price, I see how much "Mark Up" I can put on it, then consider if that is a good investment, making £3 on something you'll sell 5 off isn't really worth it in the long run... If it has a greater than £x return I know its worth it.

    However this guide does help a fair bit and I'll understand things abit better.
  3. Inferno House

    Inferno House Banned Member

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    Think i better stick with the basics :\
  4. Pete

    Pete

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    Can't get much more basic than that. You buy something for 3.87 and want to make 25% you multiply by 1.33 and get 5.15.

    Not trying to give you a hard time, but if you understood some of this you may not be in some of those messes. It's for guys like you that I post this stuff.
    .
  5. canada

    canada Retired Moderator

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    The thread is posted as a "Sticky",should help a lot of the new members!

    Scott
  6. Inferno House

    Inferno House Banned Member

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    The way i usually work things out is like this:

    Buy something say £10 + vat:
    10 x 17.5% = £11.75

    add on say 40% margin:
    £11.75 x 40% = £4.70

    Then add on to the cost price to make your resale figure:
    £4.70 + £11.75 = £16.45

    Surely this method works out right?
  7. Pete

    Pete

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    Actually, that give you 28.5%, not 40.

    To make 40 you take your 11.75 and multiply by 1.67 = 19.62 So go 19.59, 19.69, 19.99 or even 18.99.
  8. Inferno House

    Inferno House Banned Member

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    :\ :\ :\

    Ok Pete, can you give me example on this one please:

    £10 inc. vat:

    Now to my understanding the vat rate 17.5%, so 10 x 17.5% = 1.75

    However using this method:
    7 Divide 47 multiply 10 = 1.49

    So which is the VAT on £10: £1.75, or £1.49 ?

    Reason i ask this is because if it is £1.49, then surely that goes to prove that the VAT rate of 17.5% is a load of blair?
  9. boyscrapper

    boyscrapper

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    i think that the £1.49 is the VAT on £10 when it is including VAT

    and the £1.75 will be the VAT if you want to add VAT onto £10
  10. Pete

    Pete

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    I have no knowledge of how VAT is computed. Sorry, can't help you there.
    .
  11. rssales

    rssales

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  12. Beneddie1112

    Beneddie1112

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    Boyscrapper is right, the VAT rate is always 17.5%, the 1.49 you are reffering too would be 17.5% of 8.51, making it 10 inc. VAT.
  13. Pete

    Pete

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    So, you would multiply either 10 or 11.75 by 1.67 to get your 40% Gross Profit.

    Plus, if you had shipping charges that you paid, you should also add them to the 10 or 11.75 before doing the factoring. All costs in getting the goods on your shelf should be included in what you consider "COST".

    This would include brokerage fees, storage fees, hauling fees, etc. If you want to truly zero in on cost you would even include TT fees and such. All costs involved in acquiring the goods. Sometimes this can open your eyes and let you see you are not making near what you thought you were.
    .
  14. greedyboy

    greedyboy

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    As above. We use the that method to determine the 'true' cost price. When importing our 'additional costs' are represented as a % over cost. For instance, our 'other costs' are normally approximately 15% - 20% over FOB price to equal the 'landed price'.

    If you actually land a product for £10 it is actually costing you more when you factor in your personal costs 9sfter landing).

    Overhead costs should be added to the cost price also. In very simple terms if you sell 1000 items a month and you overheads are £1000 a month, you actually have to add that £1 to your product cost.

    You have to factor in your costs and something know as the x factor (not the talent show). The x factor is an additional amount or percent to cover other eventualities.

    Been up all night and my head hurts even more now!

    EDIT: I forgot to mention 'price loading' where by you load you costs on to other products leaving your core products more competitive! :)
  15. Pete

    Pete

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    We ought to write a book.

    Or patent a course. :)
    .
  16. greedyboy

    greedyboy

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    Im ready :)

    UK and USA versions covered ;)
  17. MustHaveMobiles

    MustHaveMobiles Community Moderator

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  18. Pete

    Pete

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    Takes all the fun out of it.

    The need is not only to get the figures, but to understand how they are derived. Using a tool like that is fine when you understand what is involved, but without the basics, they are still in the dark.
    .
  19. greedyboy

    greedyboy

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    Agreed. The fun is spending half an hour writing a spreadsheet with every possible cost combination telling you how much money you will or have made! :)
  20. Inferno House

    Inferno House Banned Member

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    But what i'm saying is...

    Lets go by the price of £10 inc. VAT

    The VAT rate is 17.5%

    So why the heck is £1.49 the VAT amount of £10??? surely it should be £1.75 as this would calculate to 17.5% of £10??? :\
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