The name is already meaningful here, as this term can be assigned to the area of trade. The synonym profit margin or margin is often used for the term trading margin . The trading margin is generally defined by the difference between the so-called cost price and the sales price. In general, however, a distinction has to be made between the different types of trading range, depending on which group it belongs to. The trading margin can be expressed in absolute figures, which is then referred to as gross profit, or in relative figures, which then results in the percentage margin.
In general, the trade margin is always determined on the basis of net prices and thus represents a significant variable within a company’s trade calculation.
What does the trading range say?
The trading margin is the amount that lies between the price at which a good or service is offered on the market and the cost price.
According to gradchem.com, the terms “margin” or “profit margin” also describe the trading margin and are used synonymously. The difference between the sales and purchase price results in this range, whereby there are different types of trading range. The following are mentioned as an example:
- Item range: The trade margin refers to a single item.
- Product group range: The trade range refers to all items in a product group.
- Operating margin : The margin includes all amounts that arise as a margin in the company.
- Realized trading margin : It is also known as the discount margin and describes the discount from the final price in percent.
- The planned trading margin : It describes the premium that is calculated on the cost price, in percent.
The trading margin is used so that a company can set a sales price for a product or service, which is why it is also used as a pricing tool.
What is the trading margin for?
A trading company needs the trade margin between purchase price and sales price in order to cover all costs associated with the sale of the merchandise as well as the entrepreneur’s wages and to achieve or generate an imputed profit.
So if you want to start a company or run one, you have to cover your costs and private living costs (entrepreneur’s wages) with the margin of your products.
How is the trading margin calculated?
First of all, the entrepreneur has to be clear about his costs, which arise with the sale of the goods. Typical costs are, for example:
Rent for warehouse, sales rooms, etc.
- Additional costs for the sales rooms and storage such as water, electricity, heat, etc.
- Vehicle costs, for example for vans, trucks to transport the goods.
- Personnel costs
- Advertising and marketing costs.
- Costs for sales, for example for seasonal goods, slow-moving goods
- Financing costs, for example for shop equipment
- Entrepreneur’s wage – how much one takes monthly from the business / company to finance one’s private living costs.
- Maintenance costs – if something breaks or needs to be modernized.
The next step is sales planning, i.e. what number of different products and how many pieces are to be sold per year (according to planning).
Trade premium or trade discount
In addition, a distinction must still be made between the mark-up margin – the percentage mark-up on the purchase price – and the discount range – the percentage markdown on the sales price. If, for example, a retailer calculates a surcharge of 40% on the (net) purchase price of 100 euros, the net sales price increases to 140 euros. This trade surcharge is also called the calculation surcharge and is used to determine the sales price at the known purchase price.
But the reverse is also possible: This means that the discount on the sales price can also be determined.
In this example, the corresponding discount margin from the (net) sales price would be 28.57%. The trade discount indicates what percentage the trade margin makes up from the sales price, so the purchase value can be determined quickly and easily.
How do you calculate the trading margin?
If you want to calculate the trading margin, you can use the following formula:
(Net sales price minus cost price) divided by net sales price times 100
The result is a percentage that indicates the trading range.
When calculating the trading margin, it is important to consider the imputed profit, which is made up of interest, entrepreneur wages and risk premium. The imputed interest takes into account the entrepreneur’s interest in paying interest on the capital used. The imputed entrepreneur’s wages take into account the workload of the entrepreneur or investor. The imputed risk premium is usually only used for high-risk investments and is not considered an integral part of the calculation of the imputed profit.
The different forms of trade
The trading margin is used in a wide variety of forms of trading and is used not only in the food trade, but also in trading on the stock exchange. If the purchase price is compared with the sales price in “traditional” trading, the cash price and the sales price are put in relation to each other in the financial value.
Here the mobility of the courses within a certain time interval is expressed. The type of trade also determines the level of the trading range.
For example, the trade margin in the large supermarkets is sometimes only minimal, but it still generates a profit due to the mass of products sold. A shop that specializes in certain goods and records only a few sales a month cannot afford such a small trading margin. Accordingly, the trading margin is set significantly higher here so that a profit can be made at all. Because the fixed costs also have to be paid.
This means that the trading margin needs to be carefully calculated. Right from the start it has to be clarified how much a product is worth and, above all, how much it is worth to the customer.
The trading margin is important to profitability
Regardless of whether it is in retail or on the stock exchange, the trading margin is used by the trader to make statements about profit and costs. For example, the permanent monitoring of the trade margins gives trade marketing important information about the best price calculation and the optimal purchase of goods. In addition, the trading margin also provides information about the profitability of a company, but it is never fully exhausted, because otherwise the sale would only cover costs and the company would not make a profit.