How to calculate your sales margin

Some SMEs minimise the importance of the sales margin. Don't make this mistake. Knowing how to calculate your sales margin correctly is essential for the survival of your small business. No more, no less. That's why today we tackle this subject in a clear, simple and practical way. Do you want to learn how to calculate your sales margin? Go ahead, start reading...

What exactly is the sales margin?

The sales margin or gross margin is defined as the direct benefit that a company achieves when marketing a product or service. Knowing this margin is essential to verify the profitability of a business, whatever their size and irrespective of their sector of activity.

• Knowing how to calculate the sales margin correctly “serves” many purposes:
• Make sure that our SME is achieving the profitability we had expected.
• To have reliable data in order to be able to approach sales campaigns or promotions without “getting our fingers caught in the cookie jar”.
• To be able to compare the evolution of our business with the evolution of our direct competitors.
• To know whether or not we can hire new permanent staff or additional staff for extraordinary sales campaigns.
• Making decisions about fixed remuneration or the flexible compensation of our staff.

Etc.

How is the sales margin calculated?

There are two classic ways of calculating the sales margin:

• In euro € € or what experts call absolute terms.
• In percent % or relative terms.

Forgetting about VAT, IGIC and other taxes, let's try to clarify how the sales margin is calculated with a simple everyday example: imagine you have a clothes shop and you buy a pair of trousers from your wholesaler worth 100 euros, but in your shop you put them at the retail value of €150. What is your sales margin?

Some would say that this trader's sales margin would be 50 %, but beware, that is It is not:

• If we speak in absolute terms - in euros - the sales margin of the example would amount to 50 € for every pair of trousers we sell.
• But if we speak in relative terms - as a percentage - the sales margin in our example would be 33 % and not 50 %.

I'm sure you understand the first calculation: if we buy a pair of trousers for €100 and sell them for €150, we will put €50 in our cash register. But this does not mean that we are having a sales margin of 50 %, that is the most typical mistake which most people inexperienced in the field fall into. Our sales margin in percentage terms, in relative terms, would be only 33 %. How do we arrive at this percentage? By using the following mathematical formula:

Sales margin = (Sales price - Purchase cost) / Sales price.

Applying this formula to our example we would have the following mathematical operation:

Sales margin = (150-100) / 150

Sales margin = 50 / 150

Sales margin = 0,33 or 33 %.

We would like to read your comments: did you know how to calculate the sales margin before reading this article? Was the example clear to you?