Setting A Healthy Gross Margin For Your Products

Angela Watts

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Published: August 27th, 2018

My name is Steve Watts I am the founder and owner of Slyde Handboards. We are based out of San Clemente, California. We make the ocean fun for all ages and skill levels by creating easy to learn, ultra portable and above all super fun handboards for bodysurfing.

Slyde was featured on Season 7 Episode 24 of Shark Tank and went on to secure funding from Mark Cuban and Ashton Kutcher. Slyde has been featured in the New York Times, Business insider and Forbes to name a few.

Running a business is a constant struggle of learning new things and failing a lot. We have been lucky enough to be in business since 2010 and have had our fair share of ups and downs and it was only through the guidance of others more experienced that we were able to make it through. I feel it is very important to help others as others have helped us along the way.

What is profit margin?

A profit margin is the amount by which revenue from sales exceeds costs in a business. A gross margin is the total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, and is shown as a percentage.

To put it in simpler terms...

Gross margin is the calculation of how much it costs your company to get your product or service in to the customers hands subtracting the cost of the goods or service. For hard goods this should include the cost of shipping to you and the costs that help you to keep the lights on at the business.

The calculations you take into account to find your business gross margin obviously varies by industry and individual company goal and if you are selling a service or physical product.

It can also vary on the life cycle of your company. As an example as a new company you may want to adjust your gross margin to convert more customers or have a product that has a slightly lower gross margin that will that you can use to convert customers to the higher gross margin products

There are different ways to use this number but it’s safe to say that a healthy gross margin on your goods or service as we learned here at Slyde is really important to a healthy company.

How we plan our margins

Our goal as a business is to maintain a gross margin of 70% on all of our products.

This margin allows us the advantage to offer free shipping, holiday discounts, wholesale, and distribution. We spent years finding a quality manufacturer with the best pricing. We invested in equipment that brings our costs of goods pricing down.

Margins drive many decisions in our business

We obsess over these numbers as they really make a lot of decisions. As an example, We are more likely to spend more on an upfront cost of say, a mold, in order to get our overall manufacturing cost down.

Also, some manufacturers are more likely to give you better pricing when they know you are investing in them too. We may pay more in the short term but we have done the calculations that by spending more short term.

Knowing our gross margin well has really helped us ask the right questions and find the right manufacturer for our products that have allowed us to grow year over year.

Don’t forget about overhead

When we first started, we didn’t even know what a gross margin was.

It was costing us nearly $100 to make our boards and sometimes we would sell them for $120-$150 plus free shipping. When you include our overhead, we were losing money like crazy.

This may sound painfully obvious but for us we were manufacturing and marketing a product that not many people had heard of, especially manufacturers. There was no previous costing or pricing structure to base our decisions on.

All we knew was how much people would pay for the product and we had faith that we would be able to find a manufacturer that would see potential of the brand and the product and would want to work with us to help us grow.

Gross margin is a really easy and relatively quick calculation to make that can ultimately drive your business in the right direction as it gives you solid goal to work toward with regard to how much you pay to get your product into the hands of your customer.

Making hard decisions

Once we had truly understood the impact this had on our company we started from the very bottom on the costs that we "could" change. We had to make some pretty hard decisions.

We tried to negotiate with our manufacturer who did not want to budge on their costing so we had to get rid of them and search for a new manufacturer that was willing to work on providing the right quality for the right price.

Finding a manufacturer that fits

Finding a manufacturer is easy.

Finding the right manufacturer is a little more hard and there is no golden rule to follow.

At Slyde we have had to part ways on several occasions as the manufacturers did not align with our quality control, pricing or ethics. Through the experiences of working with various manufacturers we got to learn who were the reliable manufacturers in our industry.

I am also constantly asking and talking to other industry colleagues finding out their opinions on manufacturers in my opinion this is the best unbiased way to find a manufacturer and this was how we found two of our current manufacturers who we are very happy with.

Set your required gross margin, then find the manufacturer

It was a pretty fine line to walk but knowing your required gross margin on a particular service or product really allows you to make good, and above all quick decisions on who you work with and gives you a solid base to negotiate off instead of simply agreeing to any number a manufacturer or supplier throws at you.

In the beginning of Slyde, we found we were wasting time with manufacturers that were never going to work with us to help grow the company. For the most part when meeting anybody we do business with it's a great idea to at first have a face to face conversation.

It is really difficult to gauge if a relationship is going to work when communication is only done through email or phone. Sometimes this is not always possible but i would definitely recommend it. Some of the question beyond you gut feeling on some is to find out how long they have been in business. What other brands or products do they currently work with, this will give you a good idea on who they work with

You essentially have a clear understanding on what you can afford to make the company profitable and the number that you need to walk away from if it is not reached. Saving you a lot of time and money down the road.

Lessons we learned.

The most important thing we learned especially with gross margins is that there are certain aspects of your costs that you have no control over i.e. taxes, fees, etc. You learn to cherry pick the less important costs and find a way to reduce or eliminate them.

Knowing what margins we needed from all our products also taught us to be better negotiators for the products and services we use. As an example, when negotiating with a supplier every number and cost to the product they gave back to us I quickly ran through a spreadsheet that told me exactly what our gross margin was if we had that pricing.. I could then immediately counter with a more favourable pricing.

It simply became an one of the more important gauges we use to make important business decisions.

Mistakes first time entrepreneurs make.

I think a lot of people like us forget that there are hidden costs that come into play when it comes to figuring out what a healthy gross margin is.

Time

Time is a big one, a lot of people forget to calculate time. Many small business manufacture or make their own goods. It takes time to make them. If you take 6 or 7 hours to handmake a product and you charge 50$ for it once you take into account materials cost, electricity etc you are working for well below minimum wage and it really not a sustainable business plan.

Not having a long term plan

Our long term plan was to give every single person who visits a beach the opportunity to experience the ocean and the joy of riding a wave. We knew the potential and scale for the industry. So we we anticipated we could get better pricing and better quality product as the industry grew and became more recognised.

This was a calculated risk, however we were willing to take this risk as we believed in the product and the fun and joy it brought to people using it.

It's important to do forecasting and media/PR planning but it really comes down to believing in your product enough to take the risks. Your passion is what will ultimately get you over the finish line.

Advice for others starting out

If you find yourself in a position where you have no other option but to accept a higher cost of goods sold...

Then either make sure you have enough of a financial runway to get you to the point where you can negotiate better pricing with increased volume, or find another element in your costs that you can do without until that point.

You need to be able to simply walk away and find another supplier or manufacturer that is willing to give you the pricing you need to make your dream a reality.