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Welcome to the second episode of the WagePirate Product Research Free Course, where I will be discussing what margins are, how you can calculate for them, and what are the margins that you should be looking for in a product before you go out and sell it.
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What is a Margin?
In a general business context, the margin is the difference between a product or service's selling price and the cost of production, or the ratio of profit to revenue.
Below is a part of our Master Sheet that we are using for our Pirate Product App:
If you are unfamiliar with the Pirate Product App, you can click this link that will direct you to The Pirate Club, which is my monthly membership group where you can get access to three things:
- The Pirate Academy, our library of BEGINNER-FRIENDLY videos which show you how to do EVERYTHING you need to do to make $1000 with your store;
- The Pirate Product APP, our private app which gives you hot-selling products you can test along with READY-TO-GO videos with multiple marketing hooks, and text to use in your Ads immediately; and
- The Pirate Community, our members-only facebook group where we will answer your questions and connect you with other people in your shoes. With experts posting in there also to help with all aspects of your store!
Product Margin Calculation
Let's go back to the Master Sheet. What happens is my product researcher puts in around 10 products a day to this sheet, and one of the ways we pick the most potentially profitable products is by looking at their margins.
Before we go in any deeper, it should be well noted that the higher the margin of a product is, the better is its chances to help you make a profit. So let's take a look at this ionic brush. If we would take a look at our competition, they are selling this product for US$39.00 (selling price) and are offering free shipping for it. And by clicking on the AliExpress link, this product is being sold at $8.70 (cost of goods) and with free shipping, as well.
With these costs, we can compute for our net profit using this formula:
Net Profit ($) = [ Selling Price ] - [ Cost of Goods ]
That should give us $30 net profit per sale. This means we can spend a maximum of $30 on our ads before we start losing money, if we're not accounting for profit straight to our pocket. And with these data, we can now calculate for our product's margin:
Margin (%) = 100 * [ Net Profit ] / [ Cost of Goods ]
For products under $50, we usually look for products that have at least 70% margin; and for those above $50, we can still afford to have a lower product margin. This product obviously ticks the box with its margin at almost 80%. So what does this mean? Out of our total revenue, we get to take home 80% of it and potentially spend all of it on ads to be able to breakeven.
Let's have another example:
Let's say we have a product that we can sell for US$99.00 and buy for $45.00. By doing all calculations we can only achieve almost 55% product margin, which is still not bad, considering that we still get to take home $54 and spend it all on ads. This just goes to show that when we are selling a pricey product, a slightly lower product margin is still acceptable because you're making more net profit per sale.
Now, I just want to go out of my way and really explain this to you: the higher the margin, the more net profit you're going to make at any price point -- and this is a given rule in the field of eCommerce. So if we take that second product and sell it to our website for US$109.00 and buy it for $45.00, we are going to have a slightly higher product margin and an additional $10 in net profit.
If you work with a higher margin, you are going to make more net profit per sale, and that gives you more money to spend on Facebook Ads. And the more you spend on the platform, the better position you are going to be in. Remember that Facebook is an auction-based system, wherein the highest bidder will get the best services out of what they are paying for.
Let's Wrap It Up!
So now that we understand what a margin is and what values you should be looking for in a product at any price point, here's what I taught my product researcher to do: any product that should end up in the Pirate Product App should have more than 70% product margin, AND we should only have products that can make us at least $20 in net profit before ad spend.
In this free product research course, I'm aiming to properly guide you through the step-by-step process of dropshipping, starting from the very bottom. Hopefully, by the end of this course, I would have turned you from a rookie to a proud expert product researcher.
If you have any more questions about product margins, The Pirate Academy, The Pirate Product App, dropshipping in Australia or anything regarding this video, feel free to personally contact me via the Contact Form HERE. You can also leave your comments and feedback below, and our team over at WagePirate will definitely get back to you with a response. For more reviews, news and updates, do not forget to subscribe to my YouTube channel!