How to Calculate Average Profit Margin

My name is Kyle and I’ve sold more than $15 million worth of products online over the past 15 years. In that time, one lesson has consistently stood out: maintaining healthy profit margins is crucial to running a successful product-based online business. I've covered calculating profit margins for individual products before, but today I’m diving deeper into two critical concepts: how to calculate average profit margin and calculating weighted (or blended) profit margins.

Average Profit Margin

Calculating your average profit margin is straightforward. Here’s the basic formula:

Average Profit Margin = (Sum of Individual Margins) / (Number of Products)

Let’s break it down with an example. I sell a product called Apple Pie Moonshine Spice Mix, available in several variations: a single pack, double pack, five-pack, ten-pack, and a wholesale case of 72 units. Each variation has its own margin:

  • Single: 40.4%

  • Double: 49.5%

  • Five-pack: 50.2%

  • Ten-pack: 50.2%

  • Case of 72: 40.1%

Adding these margins together (40.4% + 50% + 50% + 50% + 40%), we get 230.4%. Dividing this by five (the number of product variations), we have an average margin of 46.1%.

To simplify this calculation, I use my Solid Strat Margin Calculator, which breaks down each product’s costs (ingredients, packaging, labor, shipping fees, etc.) to calculate precise margins. It also conveniently calculates the average gross margin automatically.

Weighted (Blended) Profit Margin

A weighted profit margin—also known as a blended margin—is a more comprehensive measure. It calculates your overall profit margin by considering how many units of each product variation you actually sell. Here’s how the formula works:

Weighted Margin = [(Margin₁ × Units Sold₁) + (Margin₂ × Units Sold₂) + …] / (Total Units Sold)

To illustrate, let’s assume these approximate sales figures:

  • Single pack: 50 units sold, 40.4% margin

  • Double pack: 300 units sold, 49.5% margin

  • Five-pack: 30 units sold, 50.2% margin

  • Ten-pack: 10 units sold, 50.2% margin

  • Case of 72: 1 unit sold, 40.1% margin

If we calculate using these sales figures, our weighted margin might come out differently than the simple average. For example, even though our simple average margin is 46.1%, the weighted margin may be higher if we sell more of the high-margin double packs.

But why does weighted margin matter so much? Because it reveals how your actual sales mix affects profitability. Imagine you offer a deep discount on a particular product variant that has a lower margin, dramatically increasing its sales volume. This can drag your overall profitability down, possibly below sustainable levels. Let's do one last example to illustrate this.

For instance, let’s say you deeply discount your two-pack and sell 500 units. Here are the new margins and sales figures.

  • Single pack: 50 units sold, 40.4% margin

  • Double pack: 500 units sold, 34.3% margin

  • Five-pack: 30 units sold, 50.2% margin

  • Ten-pack: 10 units sold, 50.2% margin

  • Case of 72: 1 unit sold, 40.1% margin

This drops your weighted margin from above 43% down to around 35.9%. If you’ve seen my other videos, you know margins below 40% are risky territory.

Why You Should Care

Understanding your weighted margin helps you avoid the hidden trap of discounts and promotions that might look attractive at first but ultimately undermine profitability. It ensures you remain profitable, sustainable, and competitive.

You can simplify your life significantly by using tools like the Solid Strat Margin Calculator. For just $10, this tool not only saves you valuable time but also helps ensure your business maintains healthy margins.

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