A discussion centred around the cost of sales (COS) and profit margin on an ADVFN Guild forum was an interesting one, if not confusing for some readers. Given the variables and grey areas and the knowledge, some companies understate their COS to boost the company's margins; thus profitability, I thought it would be a worthwhile topic to feature.
OptiBiotix and industry context.
Gross Margin: This is the sales price minus the cost of producing, warehousing, and distributing the goods. The higher the gross margin, the more money we make on the sale of our products. Royalties and profit share have a 100% margin.
The gross margin reported in the annual and interims accounts is a composite of sales and royalties across the whole company and is affected by:-
- The sales channel: Direct to consumer sales via the online store typically have a higher gross margin than selling via an intermediary (although marketing costs will be higher and effect the new margin)
- What is sold (ingredient or final product): Product sales (e,g CholBiome X3, GoFigure) typically have a higher margin than ingredient sales. Selling final product provides a double margin - on the ingredient sale to the manufacturer and the sale of the final product.
- The end customer: Sales to Pharmacies, GPs, hospitals will have a higher gross margin than retailers, but volumes will be lower. The aim is to have a mix of high volume retail sales and higher margin sales to pharmacies etc.