What is GP %? Gross Profit Percentage is the profit margin on a product after the initial wholesaler purchase cost. This refers to product only, not services that you may offer.
Lets work on the 40:20:40 rule.
..an item retails in your store for $10.
$4 of that goes to the manufacturer of the product.
$2 additional will probably go to the distributor of that item.
Leaving $4 profit for you.
Now.. Depending on who you get the item from, or what the item is, you may pay $5 or $6 direct to the manufacturer and bypass a 3rd party wholesaler altogether, leaving a profit margin of somewhere between $4-$5. This is a better deal. If you can source your product direct, you may be able to save some dollars bypassing a distributor, however.. be aware!!
Some products in some countries have a dedicated supplier. Going around them and sourcing your product direct, which is called “Parallel Importing” may cause you some grief down the line.
Be true to your wholesalers. They can cover you for such things as warranty replacement, and faulty goods, so you would be wise to stick to a good working relationship with them.
Gross Profit is different to your NET Profit. Net Profit refers to your profit margin AFTER Tax & Expenses, usually measured on your overall product range on a weekly, monthly or annual basis.
Working out your Gross Profit %.
A simple calculation.
RRP (Sale Price) minus Wholesale (Cost) = GP (Gross Profit $)
GP Divided By RRP x 100 = GP %
$9.95 - $4.95 (incl GST) = $5
$5.00 / $9.95 = (0.502 x 100) = 50% GP
Ideally, I would advise a Retail store should be working on a minimum GP of 38% on any single product with the overall GP at least 45%. Any single item above this should be considered your premium product and given Pride of Place within your store.
Any discounting will directly affect your GP% so be careful.. keep your eye out for my next article entitled “Saving your GP.. when NOT to discount” (link)
Written By Matty Mac Oz Retail Group