The “margin” is the profit margin that results from the difference between the manufacturing or purchase price and the sales price for products or services. This is the amount that remains with the selling company as a profit mark-up .
According to whicheverhealth.com, the margin is not to be equated with the profit, it rather represents the contribution margin . This amount is therefore used to cover all costs associated with the business. For example, be it costs for employees or proportionally for office space. The margin must therefore be clearly distinguished from the profit, since the profit is only calculated after deducting the costs. The margin can thus be used as the basis for an approximate profit calculation.
It is also worth mentioning that in individual sectors, the margin is understood to mean something different, such as interest rates in the financial sector.
Margin and profit
A corresponding margin is the basis for every company to be able to generate a profit at all. It is only possible to cover your own costs and generate a surplus by means of appropriate surcharges.
A distinction is made between the following two types of margin:
|Gross margin||The gross margin indicates the percentage of sales that are left over when the manufacturing costs are deducted from the sales price. Accordingly, the gross margin can vary depending on the industry. Software companies that have no real production costs can de facto not make a calculation, while production-intensive companies have high manufacturing costs.|
|Net margin||The net margin is more meaningful than the gross margin, because here not only the manufacturing costs are taken into account, but all the company’s costs. Thus, the net margin indicates what percentage of sales remains after all costs have been covered.|
|Operating margin||With the operating margin, the company’s earnings are related to sales. This calculation would also be possible for a single product or a single division. This shows the respective earning power of the area or product under consideration.|
Profit margins by industry
Different industries, different margins! The amount of the margin can vary greatly depending on the industry. Within the respective industries, however, there is usually an uphill battle to optimize margins and thus be one step ahead of the competition in terms of your own profitability .
Margin in finance
In the financial sector, the term “margin” occurs in different ways. For shares, for example, the margin indicates the difference between the issue price and the purchase price or the current price. In the case of loans, the margin is the surcharge that the bank charges customers. It therefore procures the capital more cheaply and passes on the loans with a correspondingly additionally calculated margin .
Margin in trade and manufacturing
The margins in retail are very different. There are products on which large department stores only have a few percent margin, especially when there is a lot of competition and the goods are easily exchangeable. It is often calculated that the retail trade will double the purchase price; the term “retail margin ” is often used here . In individual segments, especially with luxury goods, much higher margins are possible, which are in the range of the multiple purchase price.
Margin in gastronomy
The margins in gastronomy sound high at first. As a rule of thumb, three times the purchase price of the products should be used as the sales price for food. However, it is important to consider the costs that have to be covered by this margin, because that is a considerable amount.
The margins on drinks, which are usually larger profit makers than the food, are attractive. This is especially true with alcohol, for example when a whole bottle of wine is ordered.
How is the margin calculated?
Basically, it can be said that with the margin, the existing costs are always compared with the actual sales price. The margin therefore always indicates the relationship between costs and profit.
A simple example can also illustrate this:
A furniture store sells a sofa for 500 euros net. The sofa was bought for 250 euros net. The result is a difference of 250 euros net, from which the costs have to be deducted, which could be determined proportionally, for example for the working hours of the employees in the department in which the sofa was sold or the rent for the exhibition space of the sofa. The amount is reduced to 100 euros , for example , which ultimately corresponds to the net margin.
In this simplified example, the calculation turns out to be easy, but it is advisable to use software or an online margin calculator for more complex cost structures .
Increase margins by reducing costs
If the margins have to be increased in order to increase one’s own profit, the prices for the customers do not have to be increased automatically. Rather, companies can also take a close look at their costs and find savings opportunities.
Aside from a price increase, reducing costs offers a quick way to increase your own profitability and also to increase the margin. Here, every percentage point counts, because after all, many small cost factors flow into the calculation of the margin. In addition to personnel costs, administrative costs can usually be reduced and fixed costs should also be checked regularly – such as contracts with mobile phone providers, insurance companies and rental contracts for business premises. Here it is important that you, as an entrepreneur, keep an eye on costs and negotiate regularly or change providers in order to be able to achieve the highest possible margins.
Are negative margins possible?
It sounds surprising, but yes, negative margins can actually make sense! There are different scenarios for this.
Option one is classic lure offers in retail. A very low price is heavily advertised in order to attract potential customers to the store. It is hoped that they will also acquire other products that have correspondingly positive margins. Thus, ideally, the margin must always be calculated for the average shopping cart and viewed holistically.
Manufacturing companies have another option. When the order book is bad, it may still be better to make products that sell with slightly negative margins than to stop production entirely. Because when production stops , the fixed costs for machines continue to run and nothing is sold at all, so existing customers may drop out completely.
It is clear that negative margins cannot be used sustainably. So they can only be temporary and you have to plan very carefully to what extent this approach is affordable.
The terms “ profit ”, “ margin ” and “ trading margin ” are often mixed up and not clearly delimited. Put simply, it can be summarized that the trading margin indicates the premium that a retailer adds to the purchase price of the products. The margin, on the other hand, indicates – depending on the calculation method – how much of this trading margin remains after the costs that can be allocated have been deducted. The profit remains if other costs are also deducted that cannot be clearly assigned, but are also incurred for the company.
Thus it can be said that there is a subtle difference between the terms, even if they are mostly used as synonyms.
Calculate the sales price based on the margin
The process does not always have to be such that a sales price is given first, from which the margin is then calculated. The procedure can also be reversed exactly. A retailer can thus buy a product and specify that he wants to achieve a 150% margin, for example . He expects the purchase price of the desired margin added, thus determining the amount of the sale. Of course, he has to be realistic and always keep an eye on competing products .
High margin products
High margins can be achieved in very different areas. A classic example are all those products that often focus on marketing and the story around the product. It is often the case with coffee, for example, where many providers rely on high prices and invest them in order to turn shopping online into an experience through intensive marketing.
Another example are apartments in sought-after locations. In times of the real estate boom, construction costs also rise in line with the high capacity utilization of the construction companies, but the sales prices achieved are often very profitable.
High margins can also be found in some areas of gastronomy. Delivered food is trendy and often has attractive margins, as many products have low purchase prices and someone who wants to order quickly online does not pay close attention to every euro.
For entrepreneurs, margins are probably one of the most important things to be successful. You decide how much your own actions and actions pay off. That is why it is so important to have your own numbers under control and also to know which products and services generate which margin. In this way, decisions can be made about the product portfolio and it shows which strengths and weaknesses the company has in terms of its own profitability.