TSH 32: A hack to working our your target gross profit margin

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Let’s end the argument on gross profit margins.

Every time I post about my 50/30/20 rule, there’s always a couple of people who say that they can’t achieve a 50% gross profit margin - which is fine.

That’s the beauty of ratios - they can move.

The point is not to take the rule so literally that you must have these numbers. It’s to get you aware of what you need in terms of a gross profit margin and an operating expense ratio, in order to obtain your desired net profit margin.

Net profit margins: Choose your own adventure 

And your net profit margin can be whatever you want it to be - the choice is yours. There’s no right or wrong - IF you know what you’re in for. That is a very big IF, because many businesses don’t know where they’re going or how to get where they want to.

You know in my opinion on profit, it trumps everything except cash. I really don't care what you target as your net profit margin. (I really do). 

If it were me, I would be aiming for at least a 25% net profit margin in my ecommerce business. AT LEAST. Because, you know, I like nice stuff.

I developed a profit-led way to work out what gross profit margin you need, with your current level of monthly operating expenses, all based on where you want your net profit to be. After all, isn't that what it should all be geared around?

So here’s my Profit-Led Gross Profit Calculator

You’ll need paper, a pen, and a calculator.

1. Write down your ideal net profit margin. Let’s say 25%. 
2. Write down your operating expense ratio. That is, your monthly sales less tax, divided by your monthly operating expenses (with a % symbol next to the number). Let’s say 35%. Also known as your Opex ratio. 
3. Add the two numbers together. So that’s 25% + 35% which equals 60%. 
4. That number is your target gross profit margin.
5. Test it. 60% gross profit - 35% Opex ratio = 25% net profit.

In numbers:

Target net profit: 25%

Current Opex ratio: 35%

Opex + Target = 60%

That is your target Gross Profit margin.

Let's test it:

GP margin 60%

Opex ratio 35%

GP margin - Opex Ratio = 25% net profit margin

Here are two more examples in scribbles.

This calculator forms part of a new system I've developed to help ecommerce businesses double their profits in 12 months. I'm looking for 5 brands who want to make profit improvements in 60 days. Reply to this email.

Until next week,

Paul

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