Margin is the difference between a product’s selling price and the cost of production. The margins for sales on products may only include the actual cost difference and not other variable costs or overheads. When you are buying products from a manufacturer for resale in your store, then you need to calculate the margin carefully by including all overheads such as utility bills and rental of your premises.
How to calculate Margin?
You can determine margin by calculating the difference between the cost to buy or make the product and the selling price of the product. For example, you sell a product for $20 and it costs you $8 to make it, then your gross profit would be $12 and the gross margin would be 60%.
Types of Margin
- GROSS PROFIT MARGIN- This ratio indicates the relationship between gross profit and net sales. The higher the ratio, the lower the cost of goods sold. Gross Profit is the total revenue excluding the cost of goods sold.
FORMULA: Gross Profit Margin = Gross Profit / Revenue x 100
- OPERATING PROFIT MARGIN- The objective of computing this ratio is to determine the operational efficiency of management. Operating Profit is the total revenue excluding the cost of goods sold and operating expenses.
FORMULA: Operating Profit / Revenue x 100
- NET PROFIT MARGIN- Net Profit Margin indicates the overall efficiency of the business. The higher the net profit ratio, the better the business. Net Profit is the total revenue excluding all expenses, interests, and taxes.
FORMULA: Net income/ Revenue x 100
Ways to increase your Margins
- Carry out an Audit: You need to analyze the costs that are extremely high and the potential areas of your business where the revenue is dropping. Carrying out an audit helps to review your incoming and outgoing revenue.
- Reduce operating costs-Merchants should always look for new and effective ways to reduce operating costs without compromising the quality of their products or making operations more difficult.
- Don’t obsess over per order profits- Instead of focusing on profit, provide the customer with the best of services. Solve problems, compensate the customers if they are disappointed. Satisfied customers refer brands among their peers if they are pleased. This helps create a customer base and retains customers.
- Increase the trustworthiness to generate sales- Building trust between you and a first-time shopper encourages them to make frequent purchases from your business. This increases profit margins in the long run. To strengthen trust, a loyalty program can be set up wherein customers are given points to make them come back.