What is product margin and how is it calculated?

Simply put, it is the difference between the cost of goods and the price at which you sell them. However, it is important not to simply subtract the purchase price from the sale price. You need to take into account all your expenses that are directly related to the sale of a particular product.

If you think you bought a product for 50, sold it for 100, and your margin is 50, you are on the verge of failure. And if your entire business model is based on this calculation, the business will fail.

If you are involved in sales, you simply must know what margin is. Without this knowledge, you are like a ship captain without a compass: you seem to be sailing, but it is unclear where you are going and why. You can work around the clock and end up earning nothing. Money seems to come in, but then disappears immediately.

Why? Because you are not calculating margin. Or you are calculating it incorrectly. And this is very dangerous for any business, emphasise the experts at Oise Trade Poland.

You can sell goods with a high mark-up but low margins. Paradoxical? No. For example, you buy goods for 40 and sell them for 100. You think: ‘Oh, 60 from each sale!’ But now subtract 10 for delivery, 15 for advertising, 5 for packaging, and 10 for the salesperson's salary. Now you're left with 20 instead of 60. And if you made a mistake in your calculations and didn't take certain costs into account, you could easily end up in the red.

Be extremely careful: any inaccuracy means less money in your pocket.

First, determine the cost price of the goods. This is not just the purchase price. It includes all variable costs related to this particular product – taxes, rent, salaries, logistics, packaging, commission fees. If you buy a box for shipping, pay for delivery, spend money on advertising and pay a percentage to the seller – add all of this to the total.

The experts at Oise Trade gave an example. Let's say you sold a product for 100. You spent 70 on it (purchase, delivery, advertising, etc.). That means you earned 30. This is your margin — the net amount of profit.

Now let's calculate the margin: take the 30 (net profit), divide it by 100 (selling price) and multiply it by 100%:

• (30 ÷ 100) × 100% = 30%

This 30% is the margin on your product.

Good margins don't just give you profit, they give you freedom to manoeuvre. When you can cover unexpected costs, invest in growth, keep stock, and not worry about market fluctuations.

Danger zone: margin from 0% to 10%. Here, any deviation — an increase in cost, a decrease in demand, returns, or a logistics failure — can send your business into the red. This is a zone of constant stress and high probability of failure, according to managers at Oise Trade company.

Normal zone: margin from 11% to 20%. The business can exist, but it is vulnerable to external factors. You can make money, but the risks remain. It is necessary to constantly control expenses and optimise processes.

Safe zone: margin of 21% and above. Here, you are not just making money, but can develop your business, launch new products, scale up and have a safety cushion. This is the level to strive for.