Calculating retail profit margin

It is important to get a clear idea of the pricing structure before approaching Booths. The first stage is to understand exactly what each unit costs you to produce. Factors you need to factor in include:

  1. Labour
  2. Ingredients
  3. Packaging
  4. Storage
  5. Labelling
  6. Distribution
  7. Marketing contribution
  8. VAT (if applicable)

Once you have a clear idea of what it costs you can then add a profit margin for yourself. This will give you a cost price that you will sell to Booths. You may choose to vary your cost price depending on quantity of stock ordered (as it will cost less per unit to distribute).

The next stage is to understand what the retail price is likely to be. This is done by setting a realistic profit margin for the retailer.

The way you calculate retailer profit margin is:

  • Step one: (RRP less VAT if applicable) – cost price = X
  • Step two: X÷RRP x 100 = % gross margin

Example (no VAT):

  • Step one: £1.20 – £0.70 = £0.50
  • Step two: £0.50÷£1.20 x 100 = 41.67%

The final stage is to measure your pricing against your competitors to see whether you will be competitive and still deliver good levels of profit margin to Booths. Armed with this information you can negotiate your cost price from a much stronger position.

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