Margin explained simply: How to calculate the correct sales price (including Excel template)

**Contribution margin, profit, gross margin, net margin? The correct price calculation can be confusing at first, but is essential, especially for founders, in order to be successful in the long term. Read here what the margin is and how you can use it to calculate the appropriate sales price. **

Table of contents:

1. Margin definition
2. Margin and profit
3. Gross and net margin
4. Calculate margin
5. Excel template
6. What is a good margin?
7. Invoice management with GetMyInvoices

All the important answers to the topic of margin at a glance:

For founder The margin is probably one of the most important instruments for long-term success. It provides information about how worthwhile the set price for a product or service is and whether you are competitive compared to your competitors. However, it is not that easy to calculate the margin correctly: the term profit is often incorrectly used as a synonym for the margin.

Definition: What is margin?

The term margin comes from French and means something like distance or scope. The term is also referred to as trading margin, price range or raw margin and is one of the most important business KPIs (Key Performance Indicators). It is the difference between the purchase price and the selling price and provides information about the price premium for products or services sold. For example, if you buy a T-shirt for ten euros and then sell it for 50 euros, your margin is 40 euros. However, it is important that the margin is not the same as profit.

Margin and profit

The margin does not equal profit, but rather represents the contribution margin (amount that covers your fixed costs). Let’s go back to the example: The 40 euro margin from the T-shirt you sell serves to cover your fixed costs and also includes profit .

Or to put it another way: Profit is always determined from sales minus (all) costs. In addition to the purchase price of the T-shirt of ten euros, the costs include many other fixed costs such as rental costs for office space, which reduce your sales.

This is where the margin comes into play: It is the basis for every entrepreneur to generate any profit. Only through surcharges can you cover all costs incurred and also make a profit.

Types of margin

The margin differs into the following two types:

Gross margin

The gross margin provides information about what percentage of sales remains when you deduct all production costs from the sales price. If it is given as an absolute value, for example in euros, it shows the gross profit. Gross margin varies significantly depending on the industry. For example, digital companies cannot calculate gross margin without production costs. When producing clothing, there are high production costs and a correspondingly high gross margin.

Net margin

In addition to the manufacturing costs, the net margin also takes into account the total costs of your company. It indicates what percentage of your turnover remains after all costs incurred in your company have been covered. In addition to rent and personnel costs, this also includes taxes and interest. Accordingly, the net margin is much more meaningful for the company’s success compared to the gross margin.

Negative margin

It may sound surprising at first, but even a negative margin can make sense for your company! There are different scenarios for this:

• Attractive offers: You lower the margin on a product in order to make customers aware of you in the first place. In the best case scenario, your customers will buy the cheap product and other products with a better margin for you. If you then add up the value of the entire purchase, the overall margin can still be positive.
• **Bad order situation: **Even if the order situation is poor, it can still make sense to produce products with a slightly negative margin. Because if production stops completely, you still have to pay fixed costs such as rent, machine costs,

Calculate margin

The margin always compares the existing costs with the actual sales price. But how and with what formula do you calculate the margin?

Calculate gross margin

The gross margin puts your gross profit in relation to your purchase price. The formula is as follows:

• [(Selling price – COGS) divided by selling price] x 100
• = Gross margin (in %)

In our example with the T-shirt sale, the gross margin is calculated as follows:

• [(50 euros – 10 euros) divided by 50 euros] x 100
• = 80 percent

For you, this means that you purchased your T-shirt for 80 percent less than you sold it on.

Calculate net margin

As already mentioned, the net margin takes into account other costs of your company in addition to the purchase price. For example, there are fees for reselling the T-shirt on Amazon or Ebay and electricity and internet costs of 20 euros. You include these costs when calculating the net margin.

• [(Sales price – self-costten – whitetere cost) / sales price] * 100
• = net margin

For our example the calculation looks like this:

• [(50 – 10 – 20) / 50] x 100 = 40 percent

For you, this means that for every 100 euros in sales, 40 euros remain after all costs have been deducted.

Calculate sales price with margin

However, the margin does not only have to be calculated from the sales price to the margin - the process can also be the other way round. For example, you want to achieve a 90 percent margin on your T-shirt. To do this, simply add the desired margin to the purchase price of 10 euros and get the required sales price.

• 10 euros + 90 percent = 100 euros sales price

Calculate margin: Excel template

Of course, the example we have chosen is greatly simplified and in reality there are certainly more complex cost structures. To calculate the margin, we recommend our free Excel template:

What is a good margin?

The question of a good margin cannot be answered in general terms and always depends on the industry and the company. New founders of a small t-shirt company can enjoy very good margins at the beginning because the expenses are relatively low. If your company grows and, for example, you hire staff and expand your office space, costs also increase and have a negative impact on margins. These net margins are common in different industries:

• IT: approx. 11.7 percent
• Finance: approx. 11.3 percent
• Healthcare: approx. 6.8 percent
• Communication services: approx. 10.8 percent
• Consumer staples: approx. 5.8 percent
• Real estate: approx. 9.0 percent

Conclusion

Margin is a powerful tool for assessing the profitability of your business. It provides information about how worthwhile your entrepreneurial activities are and largely determines your product policy. Last but not least, even if the order situation is poor, it ensures that at least all of your costs are covered. That’s why it’s so important that you always keep an eye on your own numbers and expenses and know exactly which products and services cause which costs and income.