What is Margin?
It is a financial metric that measures the profitability and effectiveness of an organization’s operations. The difference between the selling price of a good/service and the associated costs incurred in producing or acquiring it is represented by the margin, which can be expressed in terms of currency or a percentage.
How Would it Help Businesses?
The sales process of products and services always starts from the manufacturer and ends up ending user (the consumer). However, these processes involve many parties such as manufacturer, wholesaler, broker, distributer, and consumer. Each party will encounter costs for acquiring the product or service as well as target selling price. So, how would each party calculate their profit margin from the selling price? The answer would be through calculating the dollar margin to maximize profitability and minimize lose. The formula for calculating the selling price is [SP= cost/(1-%margin)], where the cost would include all costs associated with producing and acquiring the product or service, and the %margin represent the target profit from selling the price.
For example, the cost associated with producing cellphone’s batteries for Samsung would be $10, and their target %margin is 50%. Then their selling price to wholesaler would be [$10/(1-50%)= $20]. The wholesaler will then acquire the product for $20 and want to make 20% margin from selling it the distributer. The wholesaler selling price would be [$20/(1-20%)= $25]. The distributor will then acquire the product for $25 and want to make 10% margin from selling it the retailer. The distributor selling price would be [$25/(1-15%)= $29.41]. Finally, the retailer will acquire the product from the distributor for $29.41 and want to make a 40% margin from selling it the consumer. The retailer selling price would be [$29.41/(1-40%)= $49.01].
Businesses like Versace can safeguard their desired selling price to consumers by carefully calculating the margins within the distribution channel and making the maximum profit margin. Calculating the minimum margin, on the other hand, becomes crucial for businesses looking to increase their sales volume because it enables them to identify the lowest acceptable profit margin necessary to meet their sales targets and promote higher sales volume.