How to increase your manufacturing profit margin: 6 Easy Steps

As a small manufacturing business, it’s important to keep a close eye on your profit margin. There are a number of factors that can affect your manufacturing profit margin, including the cost of raw materials, overhead costs, and the price you charge for your products.

Fortunately, there are a few simple steps you can take to increase your manufacturing profit margin. In this article, we’ll discuss five of the best ways to do just that.

What is a profit margin?

Your profit margin is a metric that determines how much revenue you are bringing in for your product relative to its cost to produce.

It’s usually calculated as a percentage - due to this, one of the great things about this particular metric is that it can be used to make comparisons across your entire product range.

For example, if you make $11 from Product A, and $5 from Product B you might think that Product A is your “better” product.

However, if Product A has a profit margin of 22%, but Product B has a profit margin of 45% this completely changes the picture. Although your revenue may be higher for sales of Product A, it isn’t necessarily your best performer overall - this is what the profit margin calculation is designed to highlight.

The formula to use to calculate your gross profit margin is as follows:

(Price - Base Cost) ÷ Price = Profit Margin

Let’s go through the profit margin formula step by step:

To calculate your profit margin for a product, you’ll start with the selling price of the product (Price).

Now, you’ll need to know your Base Manufacture Cost - this is basically the total cost to you to create your product.

To make your profit margin calculation more accurate, you can try to also include things like overheads, labor, and fees into your base cost (this will give you your net profit margin - more on this below).

Once you have these two numbers, you are ready to do some calculations!

Subtract the base cost from the price - what you are left with here is your gross profit. This is the actual amount that you “take home” in profits after selling the product for this price.

Finally, divide the gross profit by your price to get your gross profit margin.

You can also use this same calculation to calculate your business profit margins. To do this, you’ll want to add up all revenue from your products, tally up your expenses and apply the same margin formula:

(Revenue - Expenses) ÷ Revenue = Overall Profit Margin

Gross vs Net Profit Margins

Now that you know how to calculate your manufacturing business’ profit margin, you might be wondering what the difference is between a gross profit margin and a net profit margin.

The main difference is that a gross profit margin only takes into account the direct costs associated with manufacturing your product (i.e. the cost of materials and direct labor).

A net profit margin, on the other hand, also takes into account all of your indirect costs (i.e. overheads, marketing, shipping, etc.) as well as any taxes that you might need to pay.

For most manufacturing businesses, the gross profit margin is a more useful metric to track. This is because it provides a clearer picture of the manufacturing process itself, and how efficient it is.

Margins vs. Markups

One other thing to note is that your profit margin is not the same as your markup - they are calculated using different formulae and have very different usages.

A markup is the percentage difference between the cost of your product and the selling price, while a margin is the percentage difference between the selling price and the profit.

6 Ways to Increase Your Profit Margin

Now that you know how to calculate your profit margins, here are 6 ways that you can increase them:

1. Use cheaper raw materials

One of the simplest ways to increase your manufacturing profit margin is to find cheaper raw materials.

You can do this by shopping around for suppliers, or by finding alternative materials that are just as good but cost less.

Another way is to buy your supplies in bulk so that you can get a discount. This will take some upfront investment, but if you know that you’ll be able to sell the products then it could be worth it in the long run.

2. Reduce manufacturing costs

If you want to increase your manufacturing profit margin, then it’s also important to look for ways to reduce your production costs.

Look for ways that you can minimize staffing costs, or make your manufacturing process more efficient so that you use less energy and raw materials.

Creating standardized processes (via SOPs) can also help to reduce manufacturing costs while increasing quality and consistency.

Identifying if any processes in your supply chain are wasteful is another way to optimize costs: minimizing scrap where possible, ensuring processes reduce the possibility of damage, and ensuring all raw materials are stored and labeled correctly are great methods to reduce waste.

3. Increase your prices

If you’re able to increase your selling price, then this will also have a direct impact on your manufacturing profit margin.

Of course, you don’t want to price yourself out of the market, but if you’re selling your products for below manufacturing cost then it’s time to re-evaluate.

Related: Pricing Mistakes (And How To Avoid Them) →

4. Improve your sales and marketing

Another way to increase your manufacturing profit margin is to improve your sales and marketing.

If you can sell more products, or sell them for a higher price, then your manufacturing profit margin will increase.

There are a number of ways to do this, such as:

• Improving your product packaging

• Creating a strong marketing campaign

• Offering discounts and promotions

• Selling direct to consumers (otherwise known as DTC)

5. Control your overhead costs:

Manufacturing businesses have a lot of overhead costs, such as rent, utilities, and equipment. Keeping these business expenses under control can help increase profits.

In order to keep your manufacturing business’ overhead costs under control, it’s important to first identify which costs are fixed and which are variable.

Fixed costs are those that remain the same regardless of how much you produce, such as rent and insurance. Variable costs, on the other hand, change based on production levels, such as the cost of raw materials.

Once you know which costs are fixed and which are variable, you can start looking for ways to reduce your overhead costs.

For example, if you know that your rent is a fixed cost, you can try to negotiate a lower rate with your landlord. Or, if you know that the cost of packaging is a variable cost, you can look for ways to reduce the amount of material you use to ship your products to your customers.

6. Use an MRP system

An MRP system can help manufacturing businesses keep track of inventory and production so that they can make more efficient use of their resources. This can lead to increased profits by reducing waste and maximizing production efficiency.

Craftybase is manufacturing (MRP) software that offers a full suite of features to allow manufacturing businesses to better manage their finances and inventory. It includes features like product pricing, manufacturing cost analysis, and perpetual (real-time) inventory management. Try Craftybase for 14 days for free.

Conclusion

If you’re looking for ways to increase your manufacturing profit margin, then try implementing some of the tips above. By taking some simple steps, you can make your manufacturing business more profitable.