[Closed] Small/ medium sized business basics - ball park figures for profit margins?

If you go at less than 40% you will probably go bust. Do not get confused between nett and gross profit and or margins. Usually, you will find that operating costs will run somewhere between 20 & 30%, so at that level you are looking to make on the right side of 10% before the Tax man gets his finger in the pie. Much less than that you should be putting your money elsewhere.

Is the business plan a disseration? I've recently done one (25% of a module, group work), and we were only expected to produce a reasonable estimate of product cost (ie, this similar product is available at a landed price of X, these parts go into it, we reckon it can be done for...).

More important in the marking of ours was good financial projections and market research data.

I'd suggest he emails his lecturer unless it's in imminently, which I doubt it is, being the middle of easter.

It's an A level Design student. If a student is unable to make the item (if its an archetecture project, it's is too complicated to make with school based facilites, or it's too expensive to make full sized) this particular exam board expect a business plan with very broad basic costings. He has identified the target market for his product (an "eco" personal watercraft powered by electricy and constructed using eco foams and UV cured resins) and a target retail price that is competetive. He now needs to show at least some understanding as to if this price is achievable with predicted manufacturing costs and profit margins. It's all quite basic stuff but it would be nice if the percentages were vaguely sensible.

So you are after a realistic profit margin for a mass-produced zero-emission jet-ski?

Small run batch produced electrically powered 2 man open kayak shaped beasty is closer to the truth. It's not nice!

And people complain the our education system is not equipping students for jobs in the real world. This country is literally up the creek without a small run bath produced electrically powered motor to save us.

I don't know, it's equipping him pretty well for his future life. Not a lot of use for a future shop worker or accountant I grant you - but he won't be either of those. He has learnt a lot about vessel dynamics and hull forms. He has learnt about various glass construction techniques and produced a scaled model of the boat using the same methods.

As he is off to do a degree in naval architecture and is pretty much a shoe in for the 2016 Olympic sailing team as current world junior champ, it’s all pretty relevant stuff (for him!).

If he is taking it from a manufacturer's point of view and it is all theoretical you are probably not far off on margins. If he is being judged on the design/construction with no criticism of its profitablity/viability/marketability he will be fine. It could be a completely innovative product with unheard of applications or it could be a really heavy, inefficient canoe/sailing dinghy.

There are a lot of "depends" in the question. Depends on the target market ( the demographic of the market and how solvent they are).

Profit margins are subject to change for example better, more efficient production methods. Minimizing waste, maximizing efficiency will increase profit margins.

Having to warehouse finished product due to a distribution channel breaking down will decrease profit margins.

I would imagine that if he can show that he has taken these sort of things into account showing that he not only understands the design process, but also the manufacturing process he will do well. Rather than attaching an arbitrary percentage which may or may not be accurate.

Good luck to him, he may in the future be one of the ones responsible for resurrecting our ailing manufacturing sector. 😀

Isn't the profit margin based on what people are prepared to pay? Then you can subtract your costs and you're left with margin. Therefore he needs to be talking to potential customers to find out how much they'll pay.
For a business plan he might get away with a break even analysis if the product is going into production, using different sales prices.

A product, no matter how good, is dependant on people buying it. Only one of the 4Ps, but quite important.

Isn't the profit margin based on what people are prepared to pay? Then you can subtract your costs and you're left with margin. Therefore he needs to be talking to potential customers to find out how much they'll pay.
For a business plan he might get away with a break even analysis if the product is going into production, using different sales prices.

Amazing really it took us this long to get to the right answer!

Amazing really it took us this long to get to the right answer!

Easy. Price up a canoe. Price up an electric device with suitable batteries and motor to power it. An electric drill or two?

Isn't he meant to do his own research instead of asking stw?

That's the enterprise generation for you. Why pay for something that you can get for free? 😀

but is there anyone with proper real world experience in manufacture,

Amazing really it took us this long to get to the right answer!

'kin rocket science innit!

Nice smart arse comments chaps, just a couple of hours too late! 🙂

Convert wrote hours ago

He has identified the target market for his product .... [b]and a target retail price that is competetive[/b]. He now needs to show at least some understanding as to if this price is achievable with predicted manufacturing costs and profit margins.

Yes, I agree though that he should find this sort of info for himself - this was really for me. If you are in a position where one has to pass on advice and it's not really your area of expertise, it's nice to make sure what you are saying is vaguely reasonable. Thanks for all the advice though - much appreciated.

I used to manage a small > medium sized business and we used to apply a profit margin of 30% to commonplace items, 40-60% for rare/specialist custom order items and its obviously 100% profit on labour for installations and diagnosis.

Hope it helps.

As said, if he's got a retail price he just needs to take off his costs! Ta daa there's your profit. How many people are going to buy at this competitive retail price? What will happen if he increases the retail price by 10%? If he's not making enough money from this he will either have sell more units or reduce costs. What will happen if he increases the retail price by 10%? He also has to research all the costs, production, marketing,transport etc. If the cost of production, marketing and transport is higher than the retail price he will make a loss!
Then he'll have to decide how much to increase the price by and how many sales he expects to lose. Yes it really isn't rocket science, common sense in my book. Sorry if you thought it was a smart arse comment. 😉

[url= http://www.associatedcontent.com/article/1313899/how_to_fix_the_price_of_a_product.html ]This was the second on the list when I put "price fixing products" into google.[/url] Tell him to do his own research! 😉

Convert - apologies mate, I didn't see the comment you highlight which clearly shows that he's done it the right way around by finding out what people are prepared to pay.

In an effort to try and add some value here are some thoughts.

Rather than working with the concept of 'cost plus' pricing back through the value chain as a way of evaluating viability, perhaps he could take a different tack by building the product and building a value chain to meet the target price.

From a pedagogic perspective, this would be a more rewarding and enlightening approach because it would then focus the students attention on the concepts of value, features, benefits and working in partnership with suppliers in a coordinated value chain in order to deliver true value to the end user. Manufacturing works best in places like Japan and Germany because the value chains are integrated not discrete with their own cost plus pricing/margin. They share the risk.

If the student is intersted in the concept I can supply some material on the subject but investigating how supply/value chains are built in Japan and Germany and then using those insights might get him a better grade?

Thanks.

I guess what I was really hoping for was the likes of Brant or one of the other small bike designer/ manufacture commissioner business types with some ball park figures. We have banded them about for the bike industry in the past I know, I just can't remember them! The subtle nuisances of the market economy are not really what is called for here, just a blunt set of figures to see if the product he has designed is in the right ball park.

When I worked in a windsurf shop (similar market I guess) there was pretty much a flat mark up of 30% from the trade price plus VAT. I don't know what a distributer would expect to make but I have vague recollections of a 20% mark-up to cover their costs plus profit (again from the windsurf sector).

Gee

Thanks again - great response (didn't see before posting above), with some good thoughts.

Too tired to think about it anymore today - I might contact you tomorrow. Got to go home...

Well Brant's model, I think as with the rest of the micro-brand brigade, is to work directy with the manufacturer out in Taiwan or China or wherever it is, i.e. as short a value chain as possible. It's a great model for small scale businesses where you aren't selling vast numbers of units and don't need the support of other components in a more typical value chain.

Perhaps the student could look at that business model rather than introducing distributors and retailers. That way, the only thing he really needs to find out is how much this thing is going to cost to make and then how much will it cost to ship and retail it direct. In this scenario, he has far more control and minimum cost being introduced. But he does need to identify the challenges of that model, which are how you identify, engage and then maintain a relationship with a manufacturer.

If it helps, then the universal average for profit margins is around 9%, that is net profit before tax, but obviously it can be as low as 2% for a multiple retailer like Tesco and as high as 35% for a consultancy firm.

When I worked at a consultancy, we used to make 40% regularly, and 60% often. Eeh, those were the days (well, actually, they weren't as I was just an employee not a shareholder or director, so it's not as if I got a big slice of that pie).

konabunny - Member

When I worked at a consultancy, we used to make 40% regularly, and 60% often. Eeh, those were the days (well, actually, they weren't as I was just an employee not a shareholder or director, so it's not as if I got a big slice of that pie).

It was also a pleasure, convert.

Manufacturing cost +20% profit for manufacturing company, +20% mark up for distributers, +30% mark up for retailers, +17.5% VAT with a sprinkling of transportation costs along the way.

Who's paying for the print ads? The demos? Who's bank rolling it?

As a good friend of mine said once - "If you can't double, you're in trouble".