How do I check my profit when I sell well below the listed price?
Compute profit on the price you actually received, and note that margin measured on the selling price looks very different from margin measured on the list price.
Lists, labels and sale boards all use the original price as a starting point. But your bank account only sees what the customer actually paid. When you sell well below the listed price, the right way to check profit is to start from the selling price and work from there.
A worked example
Say a jacket is listed at Rs 1,000. During a sale you sell it for Rs 700, which is 30 percent off. The jacket costs you Rs 450 in all, counting product, packing, shipping and payment fee (illustrative).
- Selling price: Rs 700
- Cost: Rs 450
- Profit: 700 - 450 = Rs 250
The profit in rupees is simple. Now the margin, which is where people go wrong.
Margin on the selling price
Margin is usually measured against what you actually charged.
250 divided by 700 = 0.357, or about 35.7 percent.
That is your true margin on this sale.
Margin measured on the list price
If someone divides by the list price instead, they get 250 divided by 1,000 = 25 percent. That figure mixes up the money you earned with a price you never collected. It makes your margin look worse than it is and, worse, it hides the real picture on days when you sell near the list price.
Both numbers are useful for different reasons, but only one tells you how profitable the sale was. For decisions about profit, use the selling price.
The profit you gave up
You can also look at the gap.
- At the list price, profit would have been 1,000 - 450 = Rs 550
- At the sale price, profit is Rs 250
- So the discount cost you Rs 300 of profit on this one jacket
That is 300 divided by 550, about 55 percent of the potential profit. A 30 percent cut in price took more than half the profit. How a 10 percent discount hits profit explains why discount and profit move so differently.
A short checklist
Whenever you sell at a price below list, run through these.
- Take the final amount paid, not the list price
- Subtract every cost tied to that order, including shipping and payment fee
- Check that the result is still above zero
- Calculate margin as profit divided by selling price
- Compare it with your normal margin
If a sale price pushes your profit under what you need to cover fixed costs and ads, you are paying customers to take your stock. It may still be right if you are clearing slow stock, but it should be a choice.
If you want the sale to still pay
Work backwards from the profit you need. Start with cost Rs 450 and a target profit of Rs 200. Your lowest sale price is Rs 650. At a list price of Rs 1,000, that means a maximum discount of 35 percent. Use price from target margin formula to do this in a more systematic way, and see markup vs margin if the two terms still blur for you.
Whenever you plan a sale, write down the lowest price you can accept before you look at the discount banner. That single number protects you from deals made in a hurry.