What is profitability?
A profit is the amount of money you earn from a certain product or service, which is determined by subtracting costs from sales and setting the profit margin.
Analyzing how profitable your products and services are is an essential step for establishing sales strategies and piquing the interest of your customers. Remember that there are products that have a reduced margin and are not sold as much, so you should keep a record to decide if you should stop selling them. There are other products that have low profitability, but they bring many customers to your business.
All of your business expenses — money, time, reputation, resources — are part of your investment. What you get back is a return on that investment or ROI. The basic ROI formula is simple. Measure the additional money or value you have received — the return you gained — as a percentage of your initial investment.
How is profitability calculated?
Sale Price - Cost to Produce = Profit
Then, divide the profit by the price of the product and multiply by 100. This is your profit percentage.
$190 - $120 = $70 profit
$70/$190 = .368
.368 X 100 = 36.8% is the product's percentage of profit.
It is wise to revisit your profitability regularly, as it relates to your business plan and overall financial goals. If you launch a new product or service, you should track your profit at those milestone moments.