What is Weighted Average Margin?
The Short Answer
Weighted Average Margin explained simply
When a business sells many different products or services, each with its own profit margin and sales volume, simply averaging the margins won’t give a true picture of overall profitability. The Weighted Average Margin solves this by giving more weight to products that sell more. This means products that contribute more to total revenue will have a bigger impact on the calculated average margin. It helps business owners understand their true overall profit efficiency.
Real-World Example
The Coffee Shop Scenario
Imagine a coffee shop sells two items:
- Espresso: Sells 100 units a day, profit margin is 80%.
- Latte: Sells 200 units a day, profit margin is 60%.
To calculate the Weighted Average Margin:
- Multiply each product’s sales volume by its profit margin:
- Espresso: 100 units * 80% = 80
- Latte: 200 units * 60% = 120
- Add these results together:
- 80 + 120 = 200
- Divide by the total sales volume:
- Total sales volume: 100 + 200 = 300
- Weighted Average Margin: 200 / 300 = 0.6667 or 66.67%
This 66.67% is a more accurate average margin than a simple average of (80% + 60%) / 2 = 70%, because it accounts for the higher sales of lattes.
Why this matters
Understanding your Weighted Average Margin is key for pricing decisions and understanding your business’s true profitability. It helps you see which products are driving your overall profit and where you might need to adjust strategies. This insight is crucial for making smart business choices.
Don’t just look at individual product margins. The weighted average margin tells you the real story of your overall business profitability. It helps you focus on what truly impacts your bottom line.
Don’t just look at individual product margins. The weighted average margin tells you the real story of your overall business profitability. It helps you focus on what truly impacts your bottom line.
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