When a company looks to determine its financial health, the gross profit percentage is one of the factors. Companies that have high gross profit percentages are in strong financial health, since they have more money available to expand the business. Conversely, companies with low gross profit percentages find their financial resources severely reduced.
- Gross profit percent is the profit margin of an item. In order to determine the actual gross profit percent, a business owner takes the difference between the selling price of an item and the total cost of that item. The figure he reaches is known as the gross profit percent. Gross profit percent applies solely to the finances of a company prior to having to factor in such variables as the taxes, employee payments, as well as a host of other figures that differ from one store to another.
- The average manufacturer's gross profit percentage varies between 25 percent and 35 percent. However, items with more expensive price tags, such as motor homes, automobiles, and even houses, have markup prices of only 10 to 15 percent. Trying to increase the gross profit percentage with high dollar items can result in diminished sales, since the item has been priced beyond the buyer's comfort zone.
- In order to achieve the highest gross profit percentage, a business owner might use the "All Costs Plus Profit" method of pricing. This method of using gross profit percentage factors in the total costs of an item, from manufacturing all the way through to delivery, and then adds in the desired profit percentage. In other words, rather than allowing market forces to determine how much of a profit percentage a business makes, this method creates the percentage the business owner desires. The disadvantage to this method of determining gross profit percentage is the possibility customers will not pay the cost of the item.
- In the event competition exists for similar products in other companies, a business might decide to adjust the gross profit percentage. Obviously, if a business sells a product at less than it costs the business to manufacture the product, the business loses money on every item sold. Therefore, in order to adjust the gross profit percentage, a manufacturer can sell an item for 30 percent over the total cost of the item, rather than 40 percent. This reduction in the profit percentage can lead to increased sales, which leads to an overall profit increase.