Charles Leikauf, a fractional CFO, explains why gross profit margin matters most for product businesses. He uses a $100 sale with $20 in production costs to show why you need at least a 20% margin to cover advertising, shipping, and operations that dwarf what the product actually costs to make.
If you're a fractional CFO, if you own a product-based business and you wanna optimize it and make more money, these are the 3 ways that you can make more money as a product-based business. So let's go ahead and cover the first one. The first one is margins. So what is a margin? Typically you have a whole bunch of different types of margins in a business, but we're gonna focus on the cost of goods sold or the gross profit margin. If you sell an item for $100 and the item costs you $20, your cost of goods sold is $20. Your revenue is $100 'cause you got $100 for selling the thing. Your gross profit, which is Revenue minus cost of goods sold is $80. So your gross profit margin would be considered $80. You're like, oh, that sounds like that's a really big margin. Does it really need to be that high? It does, because you need to pay for Facebook and YouTube and TikTok and all the other ads, and you need to pay costs and you need to pay shipping and all that. So your margin needs to be pretty high because the cost of the product is not the main cost. Getting it to the customer and advertising it to the customer and like paying for your operations costs significantly more than the product. You want at least a 20% here. Yeah.
