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Understanding how much gross profit a business should make...

by Oziboomer
12 replies
In my industry that combines manufacturing with retail operations the sweet spot for achieving success lies in realising a gross profit that is above 70% and the real returns start to happen when your gross profit is 75% or above.

My primary business requires a high labour input but not all businesses are the same.

What is your personal experience or observations?

Everyone knows that without a healthy gross profit margin a bottom line profit is almost impossible and that even a small erosion in profit margin can devastate your bottom line.

What would you consider a healthy gross profit in your niche and why?
#business #gross #make #profit #understanding
  • Profile picture of the author savidge4
    If we are talking net sales minus cost of goods before "labour" and overhead etc... All of my online ventures are 100% Gross Profit.

    My actual Manufacturing business' being Large Format Printing and Vinyl sit in the 90%+ range. I do some woodworking like build birdhouses and wooden solar light post things and the Gross there is 85%+

    What gets interesting for me is my Operating Profit percentage in my Manufacturing sector is far greater than my Online sector. Seems almost counter intuitive... but the numbers don't lie! LOL
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    • Profile picture of the author Claude Whitacre
      In my Local Online Marketing service, it's about 90% profit, after I pay for the labor. (which I consider cost of deliverables)

      In my retail store, it's about 65-70% gross profit.

      But the net can be less than zero, to about 50%, after all the bills are paid. The dollar volume is what determines that.

      A $10,000 month, no matter what gross profit (in the store), we lose money.
      A $40,000 month, and we hit about 50% net profit. Many of our expenses are fixed.
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      • Profile picture of the author sandalwood
        Your thread title certainly leaves room for a variety of answers. That's good because it lets us think. For example, the words "should make" immediately popped 100% into my thought process. Then I stopped and reread the title.

        The first word, understanding, is the key. Far too many business entrants don't understand that they must first understand how they will make a profit. They believe all they have to do is open the door and business will flood in.

        In other words, the ground work needed before they open the door is missing, scanty or slip shod. This isn't a post about how to understand or how to do anything. I am merely saying you made a post that allows people to take a variety of avenues in determining their answer.

        But, I will stick with 100% just so I can contribute a number...
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        • Profile picture of the author Oziboomer
          Originally Posted by sandalwood View Post

          Your thread title certainly leaves room for a variety of answers. That's good because it lets us think. For example, the words "should make" immediately popped 100% into my thought process. Then I stopped and reread the title.

          The first word, understanding, is the key. Far too many business entrants don't understand that they must first understand how they will make a profit. They believe all they have to do is open the door and business will flood in.

          In other words, the ground work needed before they open the door is missing, scanty or slip shod. This isn't a post about how to understand or how to do anything. I am merely saying you made a post that allows people to take a variety of avenues in determining their answer.

          But, I will stick with 100% just so I can contribute a number...
          Thanks Sandalwood.

          Oh how lovely 100% gross profit would be.

          I'm not quite sure how 100% could be achieved in an offline sense.

          I understand how to sell information for what could be perceived as 100% gross profit but most people buy something because they perceive it to be worth more that what is costs....

          ...so to most people there is a cost.

          This that grey area on what information is worth.

          For some people they don't place a high value on information because they can Google it or obtain it for a low value.

          This is why the 100% thing sort of doesn't really seem 100% realistic to me but that is because even if I've been selling information via a variety of delivery methods over the years there has always been a cost....

          ...in the early days a cost for the paper prior to the expense of photocopying.

          ...now the cost of producing a DVD....or

          ..potentially the cost of "storing the data" for download...

          now some may consider the data storage as an expense but is it really an expense or a cost of sale?

          That is sort of why I started this post to get people to think about what is really the cost of what you are selling and what do you "mark-up" that cost.

          If the cost is FREE...therefore 100% gross profit....what are you really selling?

          Why would a purchaser perceive there is a value to your product?
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          • Profile picture of the author sandalwood
            Oziboomer,

            In your last post, you said:

            I'm not quite sure how 100% could be achieved in an offline sense.

            I'm not sure how it can be achieved in an online sense either. Here's why. There are four factors inherent in every business:

            1 - Risk
            2 - Inflation
            3 - Taxes
            4 - Opportunity costs

            You can mathematically figure how to incorporate taxes into your 100% or whatever number you select. Risk, inflation and opportunity costs, some would argue, can also be mathematically integrated into the 100% or whatever number.

            Let's start with risk. How much of your time, money and energy are you willing to "risk" in your business? Most people don't grasp the numerous variances that make up risk. I only mentioned three.

            Inflation is a government created entity. You don't control the government you only pay for it. So the best you can do is pick a number and hope you are close.

            Taxes. Yes, the magic number. You are only certain of one tax rate. That is the number you will pay this year. Government has been known to change that rate using several techniques. The best you can do is rely on the current number.

            Opportunity costs are something else. What else could you have done with your money, time and energy other than the business you started or are in? Now that almost always is pure conjecture.

            Obviously this isn't a treatise on any of these topics but merely a surface scratcher and food for thought. Gross profit is a nice number but what really goes into it? The answer can be complicated or it can be simple.

            Regardless, you still have us thinking. Great job.
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            • Profile picture of the author Oziboomer
              Originally Posted by sandalwood View Post

              Regardless, you still have us thinking. Great job.
              A quote I read somewhere....

              "Business is a simple thing

              All you need to do is make or buy something....

              and then sell it for more than it costs.

              That's all there is to it...

              ....apart from a few million details."

              One of the keys to success in any business is leverage.

              Usually businesses that sell things have to buy or make the things they sell so in a rudimentary way when we sell stuff the cost of what we sell increases proportionally with increasing sales.

              One secret is to reduce this cost of sales by leveraging what we do....

              ...get a discount

              ...buy better

              ...sell higher

              etc.
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      • Profile picture of the author Oziboomer
        Originally Posted by Claude Whitacre View Post

        In my Local Online Marketing service, it's about 90% profit, after I pay for the labor. (which I consider cost of deliverables)

        In my retail store, it's about 65-70% gross profit.

        But the net can be less than zero, to about 50%, after all the bills are paid. The dollar volume is what determines that.

        A $10,000 month, no matter what gross profit (in the store), we lose money.
        A $40,000 month, and we hit about 50% net profit. Many of our expenses are fixed.
        Thank you so much for weighing in Claude.

        It is always interesting what people consider a cost of sale and what they consider an expense....a bit like what is a fixed cost and what is a variable cost.

        The observation of reduced turnover regardless of gross profit is one area that I was hoping people would contribute on because unless you've been in the situation of having those everyday running costs that most "physical" business have...most people would just think "Wow" ...Claude sold three $1600 vacuums every week this month and he's rolling in dough.

        The scary thing of course as things get bigger is the inevitable "slow-down" that hits all businesses from time to time.

        The old-timers know how to spot the signs and have already cut their cloth to fit...the somewhat experienced but still optimistic tend to borrow and then cut later....and the inexperienced....well...

        ...they're the ones that say...

        What happened?

        GONE.
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    • Profile picture of the author Oziboomer
      Originally Posted by savidge4 View Post

      If we are talking net sales minus cost of goods before "labour" and overhead etc... All of my online ventures are 100% Gross Profit.

      My actual Manufacturing business' being Large Format Printing and Vinyl sit in the 90%+ range. I do some woodworking like build birdhouses and wooden solar light post things and the Gross there is 85%+

      What gets interesting for me is my Operating Profit percentage in my Manufacturing sector is far greater than my Online sector. Seems almost counter intuitive... but the numbers don't lie! LOL
      Thanks Paul for sharing your thoughts.

      So from an online perspective you don't consider any material, reports, delivery etc as a cost of sales but more an expense from an accounting point of view.

      In your manufacturing type businesses it is great that you can get such high margins....where I am we suffer from higher material costs due to a few issues like the lower population and remoteness of Australia.

      Of course those issues are becoming more level as globalisation starts to have a bigger effect and drive some material costs down.

      Do the results you see coming from your "offline activities" push you towards expanding those areas or do you see yourself pursuing and expanding the online side of your business further....I guess what I mean is do you enjoy the security of the offline side and wouldn't sever your interests in those tangible sectors for a leap solely into online?
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      • Profile picture of the author savidge4
        Originally Posted by Oziboomer View Post

        Thanks Paul for sharing your thoughts.

        So from an online perspective you don't consider any material, reports, delivery etc as a cost of sales but more an expense from an accounting point of view.
        Right now my business is 100% not local. anything and everything is done online. Its online, I have no "Materials". "Reports" are PDF's and "Delivery" is digital and free. When I had a local business, yes there was some expense. that I classified into this area that reduced the Gross Profit - anything to do with lead gen. Printing and fuel and whatever else there was. But currently I am running in a total digital environment. - any expense here is lumped I with labor on the other side of the equation. ( has sure made accounting a lot easier! )

        Originally Posted by Oziboomer View Post

        In your manufacturing type businesses it is great that you can get such high margins....where I am we suffer from higher material costs due to a few issues like the lower population and remoteness of Australia.

        Of course those issues are becoming more level as globalisation starts to have a bigger effect and drive some material costs down.
        My two secondary tier offline business'; Large Format and Vinyl have very low consumables cost. My average expense of a job in large format is right at $1.00 ( +/- ) a linear foot and that is averaging 60" paper. Paper and Ink are just not that expensive. My greatest expense in vinyl aside from the vinyl itself is the substrate. And with that, its not hard to understand I don't buy a sheet here and a sheet there. I buy bulk, as in a 20ft shipping containers worth at a time.

        Originally Posted by Oziboomer View Post

        Do the results you see coming from your "offline activities" push you towards expanding those areas or do you see yourself pursuing and expanding the online side of your business further....I guess what I mean is do you enjoy the security of the offline side and wouldn't sever your interests in those tangible sectors for a leap solely into online?
        I have a feeling < wink > you will understand diversification, it serves many well. For me and my previous business model the offline business aspects were verticals in what it is I did - local business development. I would lead with web design, and then go after store fronts and signage and in store signage etc etc etc. I consider it the "consumables" aspect of my over all business.

        Another way to look at it would be like a customer retention program. Build a website and once that is done most go after SEO or the like and we all know what the life cycle of that is. I got away from that for more than obvious reasons and went into consumables. Customer retention is far greater. Customer life cycle is greatly increased. And I seriously cant count the full circle of service that has been repeated with another site or a site for another business a business owner may have etc.

        I could without question further develop these business' I do to some extent a bit at a time. 10% growth per year on average. Some years better, not to many worse. Could I double either or both of those, yeah. I started both out of personal interest, but its not something I see myself doing day in and day out if you know what I mean.
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  • Profile picture of the author jmferret
    Varies from probably as low as 5% to 100%+ from item to item and from wholesale to retail, but I would say I am happy with average of 25-30% gross.
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  • Profile picture of the author SandraDLaurean
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    Originally Posted by Oziboomer View Post

    In my industry that combines manufacturing with retail operations the sweet spot for achieving success lies in realising a gross profit that is above 70% and the real returns start to happen when your gross profit is 75% or above.

    My primary business requires a high labour input but not all businesses are the same.

    What is your personal experience or observations?

    Everyone knows that without a healthy gross profit margin a bottom line profit is almost impossible and that even a small erosion in profit margin can devastate your bottom line.

    What would you consider a healthy gross profit in your niche and why?
    Profit realization is a very great MIS job, actually it depends what exactly is gross profit, I do not have much knowledge in accounts, but still according to my opinion actual genuine cost incurs only in HR dept, Admin / Sales / Operations has lots of revenue leakage which sneeze the profit. If any employer wants to increase the profit it is must to stop the revenue leakage. Now the question is how?
    1. Try to avoid cash transactions.
    2. All expenses should be billed with service tax. etc etc there are lots of ways to increase the profits.
    Thanks hope you enjoyed my feedback.
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  • Profile picture of the author clockface
    all the huge operations are about 6-12%. They focus on huge revenues not huge profits. (billions $$$'s)

    As a rule of thimb the smaller the business the more they focus on profit not on revenues.

    I'd be p**** if i bought something or used some business and they were running at 100% profit margins. I'll bet the competetion would do better for less. Competition wouldn't allow this business to carry on. Obviously i am talking big business here not W.S.O.'s etc.

    I don't see how you even measure information/consultancy as far as % profit any way.

    I presume we are talking physical here?
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