Product Margin: The Calculation That Keeps You Solvent

Revenue is the number that makes a business feel alive; margin is the number that keeps it open. A product sold for 25 that costs 18 to deliver leaves 7 before overheads. That 7 has to cover rent, wages, software, marketing, and the owner's own time. If the shop sells 1,000 units a month, the contribution is 7,000. If rent and wages are 9,000, the business is busy and losing money at the same time.

Count every cost that changes with a sale

Start with the obvious cost of goods: the price you pay the supplier, plus freight, duties, and any wastage. Then add the costs that only appear when an order ships.

• Payment processing: a percentage plus a fixed fee on every card transaction.
• Packaging: the box, tape, insert, and label, not just the product.
• Shipping subsidy: any part of delivery you absorb to keep the price attractive.
• Returns and replacements: a percentage of orders that come back or are resent.
• Marketplace commission: the platform's cut if you sell through one.

Add these to the unit cost before you calculate anything. The common error is to compare the selling price with the supplier invoice and call the difference profit. That number is gross revenue over one cost line, not margin.

Use the margin formula, then check the markup

Margin is profit divided by selling price. If the price is 25 and the fully loaded unit cost is 18, the margin is 7 divided by 25, or 28 percent. Markup is profit divided by cost: 7 divided by 18, or about 39 percent. The two numbers describe the same sale, but a 39 percent markup is not a 39 percent margin.

This distinction matters when a supplier raises prices. If your cost rises by 2 and you keep the same selling price, margin falls from 28 percent to 20 percent. To hold the margin, the price has to rise by more than 2, because the extra price also carries payment fees and possibly tax. Work the calculation on the full unit cost, not on the supplier price alone.

Test a price change on paper first

Raising a price is not only a demand question; it is an arithmetic question. If you raise the price by 10 percent and lose 10 percent of orders, contribution can still rise because the remaining orders carry more margin. If you lose 30 percent, the picture changes. Run the scenario at three loss levels before you change the shelf price, and give the new price at least a month before judging it.

Discounting works the same way in reverse. A 20 percent discount on a 28 percent margin leaves 8 percent, not "20 percent off profit". If the discount is funded by the supplier, the math is different; if you fund it, check how many extra units you need to sell just to stand still.

Review the numbers monthly, not once a year

Pick your five best-selling products and recalculate their unit cost every month. Supplier prices, shipping rates, and payment fees move. A product that was profitable last year may be a loss leader now, and you cannot fix what you have not measured. Keep the calculation in one sheet with the price, the variable cost, the margin, and the contribution per unit.

When a customer asks for credit terms, margin alone does not tell you whether the sale is safe. Our guide to invoice terms that get you paid on time covers the cash-flow side. For a broader checklist on costs and cash flow, the SBA's manage your business finances guide is a free reference.