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Understanding Gross Profit

Every successful person in MLM is good at convincing others to join their Team. However, it is important to understand retailing products so that you can be successful and your new recruit can be successful. A big part of keeping people in your organization is understanding the numbers and not getting them in debt from trying to market products. People can get into debt because their operating costs are too high to be covered by sales.

As a Certified Public Accountant (CPA), I could walk into any business (in any industry) and determine how profitable the company is by understanding a few key accounting concepts. All you have to do is take the Sales from the invoices per month and determine or estimate the product cost per item (cost of goods sold), and determine the gross profit:

  • Invoice Sales
  • Cost of Goods Sold
  • Gross Profit
  • Break Even Sales

Time for a real life example to make our point. I have the chance to join two different companies. One company markets makeup and the other company markets weight loss products. Here are the key numbers:

Tube of Lipstick Weight Loss Product
Sales Invoice $2.00 100% $50.00 100%
Cost of Goods $1.20 60% $30.00 60%
Gross Profit $ .80 40% $20.00 40%

Gross profit ratio of Lipstick to Weight Loss Product is 25:1. In other words, you will have to sell 25 tubes of lipstick to equal the same $20.00 gross profit as one weight loss product.

Let’s look at Break Even:

Break Even Sales is determined by dividing the Operating or Fixed Cost per Month by the Gross Profit percentage.

For example, if you spend $300 per month in delivery, stationary, meetings, etc. Your break even sales is $750 ($300 cost divided by 40% gross profit). Once you get past break even you can pocket 40% or $.40 cents on each sales dollar.

In other words, you would have to sell 375 tubes of lipstick or 15 boxes of weight loss products.

Or, you have to find 375 retail customers versus 15 retail customers to break even. Which product would you prefer to sale and which product would be the easiest to keep new recruits in the game?

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