Writer: Amaresh Wardha

Contact: services@winedien99.com.au

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SUMMARY:

Determining margins has a critical impact on the state of the business. Defining the role of margins across 8 key margin types, used in product analysis assess the financial health of products, in different contexts and different levels, for a product range, that impact the true value and bottom line of a business.​

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KEY MARGIN ELEMENTS:

PCWP:      Price a Customer is Willing to Pay

BRP:          Business Revenue Price

CM:           Contribution Margin

MM:          Markup Margin

CP:            Cost Price of a Product to sell to a customer

RP:             Return Percentage

VCR:          Variable Cost Ratio

VPM:          Variable Profit Margin

GMROI:     Gross Margin Return On Investment

GP:             Gross Profit

PPY:            Product Profit Yield

VRR:           Variable Return Ratio

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PRODUCT PROFIT YIELD [PPY]:

The PPY amount a product yields in profit dollars per sale of that product in relation to what the customer is willing to pay [PCWP]

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MARKUP MARGIN [MM]:

Gross Profit divided by the price the customer is willing to pay. This margin exists to allow operator to get an idea of how much they can contribute towards their business and its goals, from the price a customer is willing to pay for something out of their pocket.

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CONTRIBUTION MARGIN [CM]: 

The margin attained from the product profit yield of a product sold, that contributes towards funding the fixed costs (rent, cost of retained staff etc), and extrinsic variable costs (marketing, electricity etc) of the business, as a result of monies made from products sold, as well as attaining EBIT for the business, after all fixed and variable costs have been covered. 

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The trap that business operators fall into is that they think that their gross profit is the figure that contributes towards the business. However this is not the case. The product profit yield is the true figure to calculate by, because this is the actual figure that the business attains.

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We have this so we can create products that can produce sufficient money to run the business and not just meet the business expenses, but yield enough net profit, to make the business worthwhile. It also prevents the business from overestimating its revenue, resulting in hefty GST tax bill at the end of a financial year, that the business operators did not take stock off, and now have to look for funds to pay the tax office, over and above their existing taxation obligations. 

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