Sales Margin is defined as the profit made on the transaction or sale of a good or service. The sales margin is what remains after adding up all the costs of providing a product which includes manufacturing cost, materials, salaries, advertising and other relevant costs.
The specific calculations of sales margins usually defer from business to business. Sales margin is considered as an essential indicator of the success of the company. The sales margin directly translates to profitability, and it does not need sophisticated calculation software.
Sales Margin is the primary determinant of whether retailers will accept the product or not. Commission or margin of retailers, whole sellers and sometimes even resellers are included in the sales margin.
The higher the sales margin, the better it is for the company. On the other hand, a more senior sales margin would result in a higher retail price, which could be disappointing for the customers. A decent amount of cost must be recovered after selling the product, which covers all the expenses of the product as well as leaves with a fair sales margin.
The pricing of the product is directly responsible for the sales margin of the product.
Profit margin vs. Sales Margin
Since margin is also termed as gross profit margin because they show profitability before reducing the operating expenses. Depending on the product and the nature of your industry, the sales margins may be significant, modest or less.
Calculating Sales Margin
The Sales Margin formula is easy to use. For every product that is sold, you have to calculate all the costs which are involved in the manufacturing of the product. Labor, marketing, materials, and shipping are the total costs that are calculated separately. Following are the steps to be followed while calculating sales margin:
- Calculate the total revenue. Total revenue is the price at which you sold the product.
- Reduce the total cost of the total revenue. This will give the value of net profit
- Divide this total profit with the total revenue obtained in step one and this will determine the sales margin.
(-) Sales Discount
(-) cost of Goods
(-) commission of salesperson
(-) Sales margin
For example, the price of a product is $25.
The manufacturing cost for that product is $19.50.
Thus, net profit is $5.5
Now divide this net profit by the revenue or price of the product.
5.5/25 = 22%
Thus, the Sales Margin is 22%
Consider another product priced at $13 per unit.
There is an order of 2000 units from a client. If the product is negotiated and sole for $10 per unit, and the manufacturing cost and other expenses are $9 per unit.
The net profit is $4
Now divide this net profit by the total revenue of the product.
8000 / 20000 = 40%
Thus, the profit margin in this deal is 40%
The Sales Margin can also be calculated for group transactions, just like individual transactions. An example would be a software company has sold its training software and support as a package deal to a client. In this case, it is required to calculate the margin on the entire package.
Another variation in calculating sales margins is to compile the margin by the salesperson. This is useful when the individual performances of the salesperson is calculated for incentives, bonuses, and commissions.
This calculation of the sales margin does not include the overhead costs. This is the reason why these calculations may not hear the overall profitability of the business. Net profit margin is used when calculating a comprehensive view of profitability.
Cost of Sales
Include all of the expenses that are related directly to making your product or service head. If you are also involved in the manufacturing and assembling of the product, then the cost of raw materials or spare parts, if any, should also be included.
Reduce your ending inventory from the beginning inventory. Add all other expenses like assembly; sales cost, direct cost, travel reimbursement, entertainment expenses, etc.
Comparing and evaluating sales margin
You should often compare your sales margins are equal, but different periods for your own company. The gross profit margin is also assessed and compared to similar companies in the industry. It is recommended not to compare companies of different sizes. For example, a small electronics store in the neighborhood cannot be compared to Costco or Best Buy stores.
It is advised to examine the data with similar companies with similar size and in the same industry. When you compare the data with other companies, then you can learn how your profit margins are when faced against other competitor companies. This will also determine whether you have to keep the margin the same or change it to match competitors.
Sales margin is a concept which is calculated by everyone from a retailer to a company CEO. Salaries, incentives, expenses of the employees, etc. of many companies depend on the Sales Margin.