What is Sales Margin? and how to calculate it

By | January 7, 2022

Sales Margin is defined as the profit earned from the transaction or sale of goods or services. The sales margin is the remaining after calculating all the costs of providing the product which includes the cost of production , materials, salaries, advertising and other relevant costs.

Specific calculations of sales margin or sales margin in English, usually differ from business to business . Sales margin is considered as an important indicator of a company’s success. Sales margin translates directly to profitability , and requires no sophisticated calculation software.

Sales Margin is the main determinant of whether a retailer will accept the product or not. The commission or margin of the retailer, the whole seller and sometimes even the retailer is included in the sales margin.

The higher the sales margin, the better for the company. On the other hand, higher sales margins will result in higher retail prices, which can disappoint customers .

A reasonable amount of costs must be recovered after selling the product, which includes all product expenses as well as leaving a fair sales margin.

Product pricing is directly responsible for the product sales margin.

Profit margin vs. Sales Margin

Because margin is also referred to as gross profit margin   because it shows profitability before reducing  operating costs .

Depending on your product and the nature of your industry, the sales margin may be significant, moderate, or less.

Calculating Sales Margin

The sales margin formula is easy to use. For each product sold, you must calculate all the costs involved in making the product.

Labor, marketing, materials, and shipping are total costs that are calculated separately. Here are the steps to follow when calculating the sales margin:

  1. Calculate total revenue. Total revenue is the price at which you sell the product.
  2. Subtract the total cost from the total revenue. This will give a net profit value
  3. Divide this total profit by the total revenue earned in the first step and this will determine the sales margin.

(+) income

(-) Discounts

(-) cost of goods

(-) salesperson commission

(-) Sales margin

For example, the price of a product is IDR 250,000.

The production cost for this product is Rp. 195,000.

So, the net profit is IDR 55,000

Now divide this net profit by revenue or product price.

55,000/250,000 = 22%

So, Sales Margin is 22%

Consider another product with a price of IDR 13,000 per unit.

There is an order of 2,000 units from a client. If the product is negotiated and sold for IDR 10,000 per unit, and the cost of production and other expenses is IDR 9,000 per unit.

Net profit is IDR 4,000

Now divide this net profit by the total product revenue.

8,000,000 / 20,000,000 = 4%

So, the profit margin in this deal is 4%

Sales Margin can also be calculated for group transactions, just like individual transactions.

An example is a software company that has sold its training and support software as a package to clients. In this case, it is necessary to calculate the margin on the entire package.

Another variation on calculating the sales margin is to set up the margin by the salesperson. This is useful when the individual salesperson’s performance is calculated for incentives, bonuses, and commissions.

This sales margin calculation does not include overhead costs . This is the reason why this calculation may not hear the overall profitability of the business. The net profit margin is used when calculating a comprehensive view of profitability.

Selling fee

Include all expenses directly related to making your product or service head.

If you are also involved in the manufacture and assembly of products, the costs of raw materials or parts, if any, should also be included.

Subtract your ending inventory from your beginning inventory.

Add all other expenses such as assembly; selling expenses, direct costs, reimbursement of travel expenses, entertainment expenses, etc.

Compare and evaluate sales margin

You should often compare your sales margins the same, but different periods for your own company.

Gross profit margins are also assessed and compared with similar companies in the industry. It is advised not to compare companies of different sizes. For example, a small electronics store in the neighborhood can’t compare to a Costco or Best Buy store.

It is advisable to research the data with similar companies of the same size and in the same industry.

When you compare the data with other companies, then you can learn how your profit margins compare to other competing companies.

It will also determine whether you should maintain the same margins or change them to match your competitors.

Sales margin is a concept that is calculated by everyone from retailers to company CEOs. Salaries, incentives, employee expenses, etc. Many companies depend on Sales Margin.

Hopefully useful, please tell your family, friends, relatives and relatives about this post, who knows they need this post about sales margin. And of course as usual I say that I’ll see you again in posts about Economics, Accounting , Management , Business from the LearningEkonomi.com blog.