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Friday, 21 June 2013

Gross and Net Profit Margins

I have had some emails asking about what i mean by gross profit margin and net profit margins.  Hence, using a recent example i will explain what i mean.

The table below is an example of a summary of what i was hauling a week ago – or more correctly, contracting to PushX Industries to haul.

I had a small contract to haul 1 item that cost me 95m ISK at Amarr which i believe i can sell for 150m ISK in Dodixie and so generate a profit of 55m ISK.  That gives me a nice 37% gross profit margin (= 55 / 150).  I always work on profit per sales, and the gross profit margin is merely the profit margin i make on selling the product for a higher price.  Some might call it the product contribution.

However, there are other costs involved in the sale.

I need to take away 0.80% broker fee to post the item for sale (=1.2m ISK) and a further 0.90% sales tax when it sells (=1.35m ISK).  In addition, i need to account for the courier fee of 6.12m ISK.  That will leave me with profits of 46.33m ISK (and of course that assumes i don’t need to reduce the price as competitors come in to undercut).

That 46.33m net profit on the 150m sale gives me a net profit margin of 31%, which is a good level of profitability.

The bigger contract is for 13 items i bought in Jita.  I bought them all for 710.2m ISK and hope to sell them for 1.173bn ISK in Dodixie giving me a good gross profit margin of 39% (=463.124m ISK).  Taking away broker fees and sales tax + the 20.76m ISK it costs for a “Rush Job” from PushX Industries leaves me with a very healthy 36% net profit margin, or 422.417m ISK – though i suspect i will be reducing prices as competitors undercut.
Below these numbers i also show how the net profit margin is made up.  For the Jita contact the 36% net profit margin is made up from 60.5% product costs + 0.8% broker fee + 0.9% sales tax + 1.8% courier fee totalling 64% cost of sales and so leaving me with 36% profits.
In general i don’t want the gross profit margin to be below 20% which will lead to a minimum net profit margin of c16 to 17%.  Though if the actual ISK profits are high i am willing to let the gross profit margin fall to 15%.
My strategy is to focus on slow moving items which therefore don’t attract much competition – and so are high margins but low sales volumes.  That is fine with me.
Note how low the “Rush Job” courier fee is in the big scheme of things, 1.77% is not much for the chance of being able to put these items on sale within a few hours of buying them vs the normal 12 to 24 hours for a normal hauling contract.  Of course, the fastest way is the haul it myself, but that is also the most dangerous way.

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