How to calculate margin on my marketplace app?
My marketplace app has been live for about 2 months now. Sellers list products with me, I handle the transactions, and then charge a 15% commission.
If I pulled in, say, $500 last month on commission, how do I figure out what my margin on that is?
My expenses are my time (I'm not paying myself anything) and my monthly hosting fees (about $40).
So, is my margin as simple as ($500 - $40) / $500?
I anticipate spending money on a graphic designer. When I do that, would that cost go against the margin?
What about PPC advertising? If I spend on that, where does that go?
1 Answer
There are a few ways you can calculate margin (Cost accounting vs GAP)
But for your purposes, you should probably use:
Gross margin = (Revenue - Cost of goods sold) / Revenue
Cost of goods sold is any cost associated with bringing the product to your customers.
So in your case, your hosting, your listing fees (For App store), and commissions you pay (Again for app stores, etc) and any production costs (Your Time, and anything you pay other people towards the product).
Always remember to pay yourself though. That's very very important.
So the way I could calculate your margin would go like this:
3 hours of labor at $50 an hour
$40 for hosting
$100 for designer
=$290 in Expenses (Cost of Goods Sold)
With $500 in collected revenue for the month we have:
$500 - $290 / $500 = .42 or 42%
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Say I do a bunch of work in month one, and then again in month four. If I count my wages in the cost of goods sold, then my margin will bounce all over the place. I'd rather keep my salary and any product development out of the cost of goods sold. Is that kosher? Also, what about advertising costs? Do they belong in COGS? – W. Matthew Wilson 12 years ago
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Generally yes, advertising is your cost of aquiring customers. One way to still account for your time, but not have a volatile margin is to estimate your total amount of work over the course of a year or so, and then average it monthly. But you can just leave it out if you want, however if you were to go to an angel for funding, they will tell you your numbers on profitability are wrong, because you're not paying yourself. But if this is just for your own records, leaving out your labor is fine. – Bwasson 12 years ago
