How to calculate your sales margin

What exactly is 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 its size and regardless of its sector of activity.

• Being able to correctly calculate the sales margin “serves” many purposes:
• Ensuring our small or medium-sized enterprise is achieving the profitability we had anticipated.
• Having reliable data in order to approach sales or promotion campaigns without “getting caught out”.
• To compare the evolution of our business with the evolution of our direct competitors.
• To know whether or not we can hire permanent staff or temporary staff for extraordinary sales campaigns.
• Making decisions regarding fixed remuneration or Flexible remuneration of our staff.

Etc.

How is sales margin calculated?

There are two classic ways to calculate sales margin:

• In euros € or what experts refer to as absolute terms.
• In percent % Relative terms.

Ignoring VAT, IGIC and other taxes, let's try to clarify how to calculate sales margin with a simple everyday example: imagine you have a clothing shop and you buy a pair of trousers from your wholesaler for 100 euros, but in your shop you put them on sale for Public sale for a value of €150. What is your sales margin?

Some would say this merchant's sales margin would be 50 %, but beware, that It isn't like that

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

You certainly understand the first calculation well: if we buy a pair of trousers for €100 and sell them for €150, we'll put €50 in our cash register. But this doesn't mean we're making a 50% %sales margin, this is the most typical error which most novices in the subject fall into. Our sales margin in percentage, in relative terms, would be only 33 %. How do we arrive at that percentage? Using the following mathematical formula:

Sales Margin = (Selling Price – Purchase Cost) / Selling 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'd like to read your comments: Did you know how to calculate sales margin before reading this article? Was the example clear to you?