What is Margin Per Unit and Why Should You Care?
Margin per unit is one of the most fundamental metrics in business. It tells you exactly how much profit you make on each individual unit you sell. This simple calculation—selling price minus cost—is the foundation of understanding your business profitability.
Why should you care? Because knowing your margin per unit helps you make informed decisions about pricing, identify which products are most profitable, and understand how many units you need to sell to cover your fixed costs and make a profit.
How to Calculate Margin Per Unit
The formula couldn't be simpler:
[\text{Margin Per Unit} = \text{Selling Price} - \text{Cost Per Unit}]
To express this as a percentage:
[\text{Margin Percentage} = \left(\frac{\text{Margin Per Unit}}{\text{Selling Price}}\right) \times 100]
Where:
- Selling Price is the price at which you sell each unit
- Cost Per Unit includes all costs to produce or acquire the unit
- Margin Per Unit is your profit per unit in dollars
- Margin Percentage is your profit as a percentage of the selling price
Calculation Example
Let's say you sell handmade candles:
- Selling Price: $25.00 per candle
- Cost Per Unit: $8.50 (includes wax, wick, fragrance, jar, and labor)
Using the formula:
[\text{Margin Per Unit} = 25.00 - 8.50 = 16.50]
For the percentage:
[\text{Margin Percentage} = \left(\frac{16.50}{25.00}\right) \times 100 = 66]
So you make $16.50 profit on each candle, which is a 66% margin. That's a healthy margin!
Why This Matters
- If you need to cover $1,000 in monthly fixed costs, you need to sell at least 61 candles ($1,000 ÷ $16.50)
- You can evaluate if discounts make sense—a 20% discount would still leave you with $11.50 margin
- Compare against other products to prioritize your best performers
Understanding margin per unit is essential for sustainable business growth.