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This article is only for educational purposes and does not constitute legal or financial advice. Make sure you consult a professional regarding your unique business needs.
There are a lot of factors to consider when starting your business. Should you sell your goods or services online or in-store? What are some of the costs associated with either option? As you price your goods or services for sale, it’s important to take into account all of the costs that could be incurred, ultimately impacting your profit margin.
For example, let’s say a candlemaker sells candles for £10 per 8-oz jarred creation. The candle itself costs £8 to make and each jar costs £2. This means without considering any other expense, this seller will make no profit on each item sold.
Here are some things to consider before pricing online or in-store.
What is a profit margin?
When it comes to business, here are three types of profit margins to consider when pricing your goods or services:
- Gross Profit: Gross profit is any income that remains after the cost of goods sold. This includes only the costs directly associated with the item for sale, meaning raw materials and labour. This does not include debt, taxes or overhead costs.
Calculate it: Gross Profit Margin = Gross Profit ÷ Revenue from Sales
Sample calculation for our fictional candlemaker: (£10 – £8) ÷ £10 = 20%
- Operating Profit: Operating profit takes into account the cost of goods sold and other operating expenses, such as administrative or sales expenses, that are necessary to run your business day to day.
Calculate it: Operating Profit Margin = Operating Earnings ÷ Revenue
Sample calculation for our fictional candlemaker:
Operating profit: (£10 – £8) x 1,000 – £1,000 = £1,000
Operating profit margin: £1,000 ÷ (£10 x 1,000) = 10%
- Net Profit: Net profit includes the cost of goods, operational expenses, and expenses such as payments on debt, taxes and income from investments. This reflects the amount of revenue left over after all expenses are accounted for.
Calculate it: Net Profit Margin = Net Profit ÷ Revenue
Sample calculation for our fictional candlemaker:
Net profit: (£10 – £8) x 1,000 – £1,000 = £1,000
Net profit margin: £1,000 ÷ (£10 x 1,000) = 10%
Pricing online
There are some costs to consider when optimising pricing for online sales. With no bricks-and-mortar location, there are other costs a business can incur. Whether pricing for online or in-store, keep in mind these costs when you’re discounting any products or services.
- Processing fees: Fees charged to merchants for processing credit card or online payments.
- Shipping costs: From costs of packaging to shipping fees, online businesses selling physical goods (rather than services or prepared food and drink) should budget for costs associated with transporting those products to customers.
- Delivery costs: Anything from the transportation itself, like cars or bikes, to the way food is transported (to keep it warm or cold for example), contributes to on-demand delivery costs. By fulfilling orders yourself, you can reduce costs that you may otherwise incur by using a third-party delivery service.
- Sales taxes in different locations: Online sales could mean different sales taxes by location and type of product, so keep in mind how a specific product is taxed in each country you operate in.
- Monthly or recurring costs: Website hosting and domain, inventory storage, customer support, marketing costs and business taxes all contribute to the bottom line for your business. Costs that need to be continuously paid to keep your business operating should ultimately be a factor in pricing goods as they may impact your profit margin.
Pricing in-store
There are pros and cons to both online and in-store sales. Here are some costs you may incur if you operate a bricks-and-mortar business.
- Processing fees: Fees charged to merchants for processing credit card or online payments.
- Physical hardware: Point-of-sale systems, card machines, store fixtures or shelving, and initial inventory are all examples of physical hardware. These costs will vary if you are a service professional like a hair stylist who may need equipment such as scissors and hair washing stations, or a book seller who may need display racks and shelves.
- Corporation tax: UK businesses may need to pay this levy, which is calculated on their annual profits.
- Monthly or yearly recurring costs: Recurring costs for bricks-and-mortar retailers can include rent or mortgage for a physical space, employees, maintenance fees, customer support, marketing costs, and business taxes.
Remember our candlemaker? Perhaps they’ve decided to sell their candles for £15 since they found a way to source bulk jars and wax, bringing the cost to £1 a jar and £5 a candle. With the total cost of goods down to £6 a candle, they now have a £9 gross profit.
Although our seller is fictional, keeping pricing strategies in mind can help real business owners like you plan ahead and calculate how much the costs will factor into your profit margins. Ultimately there is no right or wrong answer when it comes to pricing, but as your business grows, calculating costs and profits can help you try new and more complicated pricing strategies, such as bundling or pricing goods competitively without losing money.
