How to calculate cost of goods sold and margin is a basic tenet of business. If you are in business and have no idea what I’m talking about, you will likely not be in business very long.
So let’s do a lemonade stand. So we will take a recipe and make a batch of lemonade.
Cost:
$1.97 Sugar 5 lbs
$1.00 per 3 Lemons
$3.99 Cups (50 pak) or 12.5 cents a cup
$1.99 Straws (50 pak) or 4 cents a straw
Ok, the basic recipe calls for 1 cup of sugar, 4 – 6 lemons, and 1 cup of water to make 6 servings
1 cup of sugar is about 12 ounces by weight. Cost of the sugar for the recipe is 30 cents.
Let’s go with 6 lemons because we want it strong (actually the recipe calls for 1 cup of lemon juice so depending on how big your lemons are will determine the number of lemons). So $2 for lemons.
Water will basically cost out as free.
Total cost for 6 servings? $2.30 or 38 cents a cup.
So we sell it for $1 and we make 62 cents a serving, right? Wrong. You didn’t factor in the straw and cup, 54 cents is the real cost of goods. So if you sell it for a buck your margin is:
(price – cost) / price
(1.00 – 0.54) / 1.00 = 46% profit margin
Quick pricing methods for profit?
Keystone pricing is where you just double the cost of goods to insure you have a 50% profit margin. So we would keystone the cost of good and charge $1.08.
Price a triple the COGS and you will get a 66% profit margin.
Of course the old adage is to “Price what the market will bare!”
