The sales margin: a performance indicator to calculate... and monitor!
The sales margin is an essential indicator for managing your sales activity and profitability.
Knowing how to calculate it, interpret it, use it and improve it can be invaluable for starting up or developing your business in the long term.
We'll also look at how indicators such as margin rate, brand rate and margin ratio can help you refine your analyses and compare yourself with your competitors.
Definition of sales margin
The sales margin is a profitability indicator that calculates the profit generated for companies engaged in a commercial activity, such as the purchase-resale of goods, or raw materials not requiring processing.
It helps to :
- estimate the profit that can be generated by a product, a product category, or your entire business,
- set prices to optimize margins,
- determine your break-even point,
- and drawing up a business plan.
💡 In accounting, it's part of the intermediate management balances (sig), which make it possible to evaluate a company's activity, and understand how its profits are made up. Besides, accounting software makes it possible to calculate them automatically.
Calculating sales margin
The sales margin can be calculated in two ways:
- on a unit basis, to assess the profitability of each product,
- or globally, to assess the profitability of your business.
Unit sales margin
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👉 Unit sales margin calculation : Unit selling price excl. tax - Unit purchase cost excl. tax = Unit sales margin |
▷ Example
You are in the business of buying and selling cell phones, and would like to know the sales margin per unit on a particular model:
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unit purchase price (excl. VAT): €153.56
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unit selling price (excl. VAT): €322.25
→ Calculation :
322,25 - 153,56 = 168, 69
→ Interpretation:
Each model sold generates a sales margin of €168.69.
Overall sales margin
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👉 Overall sales margin calculation : Sales excluding VAT - Purchases excluding VAT = total sales margin |
▷ Example:
You would now like to know your overall sales margin for the year generated by all your sales, given that :
- annual purchasing costs (excl. VAT): €318,000
- annual sales (excl. VAT): €532,000
→ Calculation :
532 000 - 318 000 = 214 000
→ Interpretation:
The total annual sales margin generated by your sales is €214,000.
Sales margin
Definition
The sales margin rate is an indicator of the proportion of margin achieved in relation to the purchase price of a product. It enables us to compare the profitability of different products in a range, or of our own products with those of the market, in a reliable way.
Indeed, it would be inappropriate to compare two margins in absolute terms, since a higher margin does not necessarily mean better profitability.
There are two types of margin:
- the gross margin calculated using amounts including VAT,
- and the net margin rate calculated using amounts exclusive of VAT.
Calculation, example and analysis
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👉 Calculation of sales margin : (Sales margin / Purchase price) x 100 |
▷ Example:
A retailer buys a smartphone model for €100 ex-VAT from his supplier, and sells it for €239.20 to his customers, i.e. €200 ex-VAT. His sales margin is therefore €100 excluding VAT (200 - 100).
→ Calculation of the margin rate:
(100 / 100) x 100 = 100 %
→ Analysis:
He therefore makes a profit of 100% compared with the purchase price, i.e. double.
Brand rate
Definition
The brand rate is an indicator that shows the percentage of margin generated in relation to sales (excluding VAT).
Like the margin rate, it enables a reliable comparison of profitability between two products or activities.
Calculation, example and analysis
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👉 Brand rate calculation : (Margin (excl. VAT) / Sales price (excl. VAT) ) x 100 |
▷ Example :
Let's take the previous example of our smartphone salesman, who buys one of his products for €100 excluding VAT from his supplier, and sells it for €239.20 to his customers (i.e. €200 excluding VAT). The sales margin is therefore always €100 (200 - 100).
→ Brand rate calculation:
(100 / 200) x 100 = 50 %
→ Analysis:
The seller therefore makes a 50% margin on the selling price, i.e. €100 (200 x 0.5). This also means that 50% of the selling price is used to cover the company's expenses.
What about the margin coefficient?
Also known as the multiplier coefficient, the margin coefficient is another way of expressing margin rate and profitability:
- coefficient of 1 = zero margin,
- coefficient of 2 = 100% margin,
- coefficient of 1.5 = 50% margin,
- coefficient less than 1 = loss.
It can also be used to set a sales price. For example, for a desired margin of 50%, simply multiply the purchase cost by 1.5 to obtain the minimum selling price.
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👉 Margin coefficient calculation : Sales price / Purchase cost = Multiplier coefficient |
▷ Example:
A smartphone is bought for €100, and is resold for €150.
→ Calculation of the margin coefficient:
150 / 100 = 1,5.
How to use the sales margin?
The sales margin, margin rate, brand rate and margin coefficient are performance indicators that are particularly useful for steering your company, and for convincing investors (particularly in a business plan).
These indicators make it possible to :
- ensure that prices set are profitable,
- calculate the ideal purchase price or sales price needed to achieve a precise profitability target,
- calculate the break-even point,
- compare margins with the competition,
- monitor business profitability over time,
- and make informed decisions.
Our tips for improving sales margins
Using the margin rate, have you noticed that your sales margin is "worse" than that of your competitors, or at least lower? Here are a few tips to consider if you want to improve it:
- Reduce your purchasing costs, either by buying larger quantities to take advantage of discounts, or by negotiating with your supplier, or even by finding a supplier with better prices.
- Increase your prices by aligning yourself with your competitors through price intelligence. You can play with price elasticity, but be careful not to reach a price your customers are not prepared to pay.
- Analyze the profitability of each product using the margin rate , to identify those that are less profitable, and those that are more profitable. This will enable you to make decisions and focus your efforts on the most profitable activities.
- Improve your inventory management, which can be very costly if not optimized. Don't hesitate to use inventory management software to help you do this.
And what about you? Any tips on how to manage and improve your sales margins?