How do you calculate the margin, mark-up and profit on the sale of a product?

In e-commerce, a product can generate high sales yet still result in a loss. This happens when the seller compares the selling price solely with the purchase price and overlooks commission, advertising, delivery, returns and other costs.

To set prices effectively, you need to distinguish between profit, margin and mark-up. These terms are related, but they do not mean the same thing.

What is profit?

Profit on a product is the amount that remains after deducting all costs from sales revenue.

Formula:

Profit = sales revenue – all selling costs

If you sell a product for 100 zł net, and the total costs amount to 85 zł net, the profit is 15 zł.

In your analysis, it is worth using net figures, if the company is a VAT-registered business and VAT does not constitute either its revenue or a cost.

What is a margin?

The margin shows what proportion of the selling price remains as profit. It is calculated based on the selling price.

Formula:

Margin percentage = profit ÷ selling price × 100%

With a net selling price of 100 zł and a profit of 15 zł:

15 zł ÷ 100 zł × 100% = 15% margin

The margin makes it easy to compare the profitability of products at different prices.

What is a mark-up?

A mark-up shows by how much the price has been increased relative to a specific cost, most commonly the purchase price.

Formula:

Percentage mark-up = profit ÷ cost × 100%

If the cost is 85 zł and the profit is 15 zł:

15 zł ÷ 85 zł × 100% = 17.65% mark-up

Therefore, a 20% mark-up does not mean a 20% margin. This is one of the most common mistakes made when setting prices.

Margin versus mark-up – a simple example

Let’s assume that the product costs 80 zł net.

With a 25% mark-up, the selling price will be:

80 zł + 25% = 100 zł net

The profit is 20 zł, but the margin is:

20 zł ÷ 100 zł × 100% = 20%

The mark-up is 25 per cent, whilst the margin is 20 per cent.

How do you calculate the full cost of selling a product?

A proper calculation should include all costs incurred from the purchase of the goods to the completion of the order.

Examples of items:

·        the purchase price of the product,

·        transport to the warehouse,

·        import duties and customs clearance,

·        unit packaging,

·        cardboard box and packing material,

·        picking cost,

·        marketplace commission,

·        payment fee,

·        delivery costs covered by the seller,

·        advertising,

·        warehousing,

·        estimated cost of returns and complaints,

·        discounts and vouchers.

Fixed costs, such as software, accounting or warehouse rent, can be allocated across the estimated number of orders.

Example product calculation

Let’s assume that the selling price of the product is 123 zł gross, i.e. 100 zł net at a VAT rate of 23%.

Net costs:

·        purchase of the product: 50 zł,

·        delivery of the product to the warehouse: 3 zł,

·        packaging: 2 zł,

·        marketplace commission: 12 zł,

·        advertisement linked to the order: 8 zł,

·        delivery surcharge: 4 zł,

·        warehouse handling: 3 zł,

·        provision for returns and complaints: 3 zł.

Total cost: 85 zł net

Profit: 100 zł – 85 zł = 15 zł net

Margin: 15 zł ÷ 100 zł × 100% = 15%

If the seller had only taken the purchase cost into account, they would have assumed they were making a profit of 50 zł. The actual result is more than three times lower.

How should advertising be taken into account?

It is best to allocate advertising costs to sales of a specific product or campaign. Among other things, you can analyse:

·        advertising cost per order,

·        advertising cost as a percentage of revenue,

·        profit after advertising,

·        total proportion of advertising expenditure in product sales.

If, prior to advertising, the product yields a profit of 20 zł, the cost of acquiring an order must not exceed 20 zł. In practice, a buffer is also needed to cover returns, commission fluctuations and other costs.

How should returns and complaints be taken into account?

Not every return means a loss of the entire value of the product. Some products can be resold. However, you need to take into account the costs of transport, handling, inspection, repackaging and any potential loss of value.

The simplest way is to calculate the average cost of returns over a longer period:

Total cost of returns ÷ total number of orders

The resulting amount can be added as a provision to each order.

Product margin versus order margin

A customer may purchase several products in a single parcel. In this case, the cost of delivery, packaging and handling is spread across a larger number of items. It is therefore worth analysing both the profitability of an individual product and that of the entire order.

A product with a low margin may be profitable as an add-on to the main purchase, but it may not be profitable when sold individually.

How to prepare a profitability spreadsheet?

It is worth including the following columns in the spreadsheet:

·        SKU,

·        net price,

·        purchase cost,

·        transport to the warehouse,

·        commission,

·        advertising,

·        delivery,

·        packaging,

·        customer service,

·        provision for returns,

·        profit,

·        percentage margin.

Data should be updated following changes to carriers’ prices, commission rates, exchange rates or purchase costs.

FAQ

What is a good margin in e-commerce?

There is no single figure that applies to all products. The required margin depends on advertising costs, the number of returns, competition, purchase frequency and operating costs. More important than the percentage itself is whether there is sufficient profit remaining after all costs have been deducted.

Should the margin be calculated based on the gross or net price?

A company registered for VAT usually analyses net revenue and costs. The most important thing is to use the same method across all items in the calculation.

Should the marketplace commission be calculated based on the product price?

You need to check the current rules for the specific platform and category. The basis for calculation and the rate may vary, so the calculation should be based on actual settlements.

Summary

The margin is calculated on the selling price, whilst the mark-up is calculated on the cost. To determine the actual profit, you must add commissions, advertising, delivery, packaging, handling and returns to the purchase price. Regular profitability calculations protect against scaling up sales that generate turnover but do not yield a profit.

Editorial sources – no need to publish

·        Allegro – sales fees

·        Amazon – seller fees

·        DPD Polska – volumetric weight of a parcel