Profit Margin Simplified: How to Calculate and Optimize for Success in International Trade

05/22/2024 By Luana Oliveira 3 Minutes

Contents

Having control over the profit margin ensures an understanding of how profitable the business will be in the long run and allows for strategic actions regarding cuts or additions of costs to add value to your company's business model.

When it comes to international trade, the profit margin will play a fundamental role in the competitiveness of companies and in determining their success in global markets. It represents the difference between production costs and the selling price of a product or service, reflecting the profitability of the business. Maintaining a good business, your profit margin will grow, thus providing more competitiveness for your company and greater opportunities for investment and growth.

In this article, you will understand what profit margin is and how to calculate it correctly.

How to Calculate Profit Margin?

To calculate the profit margin, subtract costs from the final price, divide by the same final price, and multiply by 100.

PM = Profit Margin
C = Costs
E = Expenses
P = Product/Service Price

The formula is: PM = {[P – (C + E)] / P]} x 100

From the result, you can calculate the percentage of the profit margin, which represents the company's overall profitability.

Another important point is to know when the profit margin is really good. This depends on the segment in which the company operates.

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Gross vs. Net Profit Margin

The gross profit margin is obtained by dividing the gross profit by revenue. Gross profit simply represents the profit (or what is "left over" after spending on raw materials, labor, and everything involved in production), and revenue means the total amount received from selling the product to the consumer.

To calculate the net profit margin, other types of costs must be deducted:

Production costs of the product – similar to the gross profit margin, such as raw materials, labor, and other general manufacturing costs;
Taxes;
Fixed administrative expenses such as rent, property tax, accounting services, employee salaries, etc.;
Variable administrative expenses such as sales commissions, fines, production accidents, delivery delays, etc.

To better understand different profit margin types, consider reading Top B2B Platforms for Exporting.

Tips for Achieving an Ideal Profit Margin

Prioritize Ideal Profit Margin

The profit you earn from each product is not as important as the profitability your company achieved in the month. Therefore, another valuable tip when choosing your price is not to focus only on how much you want to profit per product or service but to prioritize how much you want to achieve in the ideal profit margin percentage.

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Manage Costs

It's not just the profit that defines the total value of the product or service – as we've seen, expenses are factors that can greatly affect the final price. Therefore, it is essential to review every cost and expense you will have as a company to avoid unnecessary expenses that may prevent the execution of medium-term projects.

Experts state that the ideal profit margin for commerce is between 15% to 20%. In industry, the ideal is between 8% to 12%, and in services between 20% to 30%. However, sometimes the company's financial health is good, even with a profit margin below these values, and that's okay.

The calculation of the profit margin is simple but can become a problem if any error is made. Any mistake in this calculation will directly impact the company's earnings.

For additional advice, check out 5 Tips for Starting to Export Through the Internet.

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