This article explains how to calculate margin. You can modify margin in various instances within SalesManager, including Maintenance Pricing Factors and Project Pricing Factors.
What are Margin and Markup?
Margin is a measure of profitability, expressed as a percentage of revenue that exceeds the costs of goods sold (COGS). It helps understand how much profit is made from each sale after accounting for expenses.
Margin is different than Markup. Markup is the amount added to the cost price of goods to cover overheads, profit, and other expenses to arrive at the selling price. It's essentially the percentage by which the cost price is increased to determine the selling price.
In essence, while margin focuses on the profitability of individual sales, markup focuses on the relationship between the cost of goods and their selling price.
How to Calculate Your Margin Percentage
How to Calculate Margin
Margin = Selling Price − Cost of Goods Sold (COGS)
Example:
- If the Selling Price is $100 and the Cost Price is $60,
- then you calculate your Margin as follows: $100 - $60 = $40
How to Calculate Margin Percentage
Margin Percentage = (Margin / Selling Price) x 100
Example:
- If you sell a product for $50 and it costs you $30 to make.
- Then we first calculate the Margin as $50 - $30 = $20
- Margin Percentage, as ($20/$50) x 100 = 40%
So, your margin is $20, and your margin percentage is 40%.
Calculating Markup to Achieve a Desired Margin Percentage
Calculating the markup to achieve a desired margin percentage involves a bit more math. Here's the formula:
Markup Percentage = ((Margin / (100% - Margin %)) x 100%
Let's break it down:
- Margin Percentage is the desired margin percentage you want to achieve.
- Markup Percentage is the percentage by which you increase the cost price to arrive at the selling price.
Example:
- If you want a 40% margin, then your margin percentage is 40%.
- Markup Percentage = ((40% / (100% - 40%)) x 100%.
- So, the markup percentage needed to achieve a 40% margin would be approximately 66.67%