How Do You Figure Margin?
You probably already know about the importance of high profit margins, but still may wonder, “How do you figure margin?” It’s easier then you might think and the good news is you can begin calculating your margin now with my free Excel spreadsheet!
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The Formula
Gross Profit ÷ Total Revenue = Profit Margin
Example:
If your previous month’s total sales were $301,524 and total expenses were $174,100, your gross profit would be $127,424. To figure margin, take $127,424 and divide it by $301,524 which results in a gross profit margin of 42.3%.
Gross Profit ($)
$301,524 - $174,100 = $127,424
Gross Profit (%)
$127,424 ÷ $301,524 = 42.3%
Why You Should Care
Profit margin is a great way benchmark any company when considering how well they make use of their resources. After you ask the question, “How do you figure margin?” you should wonder, “What is the margin of my competition and is mine better?”
Let’s assume that a competitor has reported a monthly revenue of $539,104 with expenses totaling $373,593. In the end, they earned $237,580 more in revenue and profited $38,087 more than you.
But we’re not done comparing!
Your company had an 11.6 point higher profit margin. By asking, “How do you figure margin?” you uncovered new insight into your company, and your competition.
Who’s Better?
You are! When it comes to efficiency, your company comes out on top by making better use of your available resources. In other words, your company keeps more of each sale because your expenses are relatively lower than those of your competition.
Wall Street LOVES high gross profit margin percentages. They know it’s safe to assume that a company with a high profit margin will show strong returns. The only exception is if the company experiences a dramatic increase in overhead costs.
Doing Your Homework
One of the best ways to uncover the numbers for your competition is online at Hoovers.com. If your competition is privately held, raise your standards. Find a publicly traded company that is similar, if not identical, to your company to act as a benchmark. Percent gross profit is a great equalizer. It takes companies of all sizes and puts them on the same playing field.
Using margins from publicly traded companies to benchmark your company is a great way to set goals. The higher they are, the better you’ll feel after you reach them!
Margin & Pricing
Another question to answer after, “How do you figure margin” is,”How can it help me with pricing?”. Figuring margin percentage is a powerful tool to determine how to price your goods and services. It helps you understand how your prices influence profitability.
Some business owners are reluctant to raise prices for fear of revenue loss. But remember, if your prices are higher, you can sell less and still meet your revenue goals.
If your margin is 50% and you increase your prices by 20%, you can afford a 29% drop in revenue and still maintain the same overall profitability.
Another excel spreadsheet of mine, details how much revenue you can lose when you raise prices and still maintain the same profit margin. Your goal is to maintain the highest possible profit margin. If you experience a larger percentage of loss than shown on the sheet, and your profit margin drops after you raise prices, you need to lower them immediately.
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The opposite also holds true. If you experience smaller loses in revenue than shown above, you could safely increase your prices further. Margin can help you find that golden price point that serves your clients, and yourself, well.
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February 2nd, 2007 at 10:27 pm
Hello,
Your profit margin chart is very cool. I always get mixed up or confussed punching in the numbers then dividing then…….. I always get it, but this chart makes it quick. The only thing for me is a lot of my prices are not rounded to the nearest dollar. Some of my product are say $1.50, or $3.85, and so on. How can I modify your spreadsheet to not round the amount. That would be cool, then I could actually use it.
Thanks,
Rich Pelton
February 2nd, 2007 at 10:39 pm
If you’d like to calculate the profit margin for an individual product, you can set the format in excel for the “total revenue” and “cost of sales” cells for 2 decimal places. This will stop the rounding and let you find the profit margin for a specific product. You would need to do the same for the “gross profit” cell.
Hope this helps!
Thanks for the compliments regarding my spreadsheet.
February 2nd, 2007 at 11:19 pm
Brian,
That worked great! Thanks for the help. Now I can stop keeping all my notes and use this thing! I like that I can make quick changes just to see where a particular price is going to fall in the blink of an eye. I’ve looked around quite a bit for something like this and this is the best one I’ve found. I think it could be very usefull to a lot of small business owners like myself. Thanks again and good luck with your future endevors. Maybe I’ll hit you up again if I need any cool little programs that make life easier. Your skill with Excel is much better than mine!
Thanks again.
Rich
February 20th, 2007 at 7:36 pm
Is there a way to calculate sales if you know the costs and a predetermined margin.
March 6th, 2007 at 7:22 pm
When I use your calculator to calculate the profit margin of my retail products it works well, however when I check the math, it doesn’t seem to match up. Am I doing something worng? For instance: my item retails for $5.99 and costs $2.49, the profit margin is 58.43%. However when I multiply the cost ($2.49) by 58.43 (which equals $1.45) and then add that into the cost, it does not equal the retial price. What is going on with my math?
Please help!
March 6th, 2007 at 8:08 pm
Scott,
Yes, there is a way to determine how much profit you’ll make if you know the costs and predetermined margin. Actually, all you need to know is the margin (the cost is already factored into it). Once you have the margin, you just have to determine your selling price.
Simply take your proposed selling price and multiply it by your profit margin.
Ex.
$9.99 retail price * 61% profit margin = $6.09 profit
Hope that helps and sorry it took so long to get back to you!
March 6th, 2007 at 8:27 pm
J,
Great question! It sounds like you’re encountering the difference between markup and margin.
Margin is how much money you make on each item you sell. You’ve calculated this correctly.
Markup is how much you price your product above your cost.
Ex. (to reiterate what you stated)
Your product’s retail cost is $5.99
Your product’s cost to you is $2.49
This makes your profit per item sold $3.50
As you did successfully, to calculate margin you took…
$3.50 ÷ $5.99 = 58.43%
This is where the math episode of the “Twilight Zone” started.
You took…
$3.50 * 1.5843 = $5.55
What? What? What?
In order to reverse this equation, you don’t use the margin, but the markup. In other words, the margin tells you how much you make off each item, not how much you price it over what it costs. Which is what you’re trying to find.
Notice the subtle and mind blowing difference?
In order to calculate your markup, you must take…
Retail Price ÷ Cost = % Markup
So for your example it would look like this…
$5.99 ÷ $2.49 = 240.56%
In other words, your retail price is 240.56% over your cost.
Now when you take…
$249 * 2.4056 = ~$5.99
As my American history teacher said… “Clear as mud?”
March 8th, 2007 at 6:06 pm
I have a cost of $212. My boss says I need to have a margin of 12.6%. How do you figure what the sell price should be?
March 8th, 2007 at 10:12 pm
Wow… I think I’m going to need to update my calculator…
Here is how you calculate the selling price when you know the cost and desired margin:
Cost ÷ (1 - % Margin) = Selling Price
In your example:
$212 ÷ (1 - .126) = $242.56
To check the math, take the original profit margin formula:
(Selling Price - Cost) ÷ Selling Price = Profit Margin
In your example:
($242.56 - $212) ÷ $242.56 = ~12.6%
Hope that helps!
May 4th, 2007 at 5:28 pm
i tried to figure it out but am at a loss…..i can get the one to figure out the profit margin in percent but can’t get the first one……
is it 212 divided by 1 minus .126=211.87
is it 212 divided by .126 minus 1=1656.66666
is it 1 minus .126divided by 212=.0041226
is it .126minus 1 divided by 212=-.0041226
please help………
July 9th, 2007 at 2:50 pm
Hi Pat… in case you still havn’t figured it out
it is
212 divided by (1 minus 0.126) (0.126 beeing your margin of 12.6)
that is 212 divided by 0.874 = 242.56
I agree that the difference between the concept of margin and the one of markup is … well… just to make the accountants feel superior!
Common sense and accountants….
Further more, margin is a Finance or Acounting tool for analyse purpose whereas markup is a day-to-day easy tool, used as %… like a price increase of 5%, or VAT etc is calculated this way. So, although valid and teorically sound, the margin calculation is here just to mess with common people’s heads!
July 10th, 2007 at 9:42 am
Agreed Antoine!
October 31st, 2007 at 8:31 am
Brian
I need to determine profit margin however I am in a unique situation I manage an account that rents a service to company’s. So there is no Sales cost our cost would be labor costs (salaries paid to laborers) would I simply replace cost of sales with cost of Labor to determine profit margin?
Also we have revenue coming in for other things on a monthly basis outside of the monthly rentals. Let me explain we are a telecommunications company who provides trading telephones in the NYSE. Any time a firm moves a phone disconnects a phone or disconnects or connects a line these are all billable to the customer. How would I include these in total revenue and should I include these?
Thank you,
October 31st, 2007 at 6:54 pm
You’ve got it Charlie!
First you need to determine your gross profit. Considering you are a service company you’d have salaries (as you mentioned) and I’d guess some maintenance costs? Regardless, total up your expenses. Then, total your revenue, regardless of where it came from, and remove your expenses from it. Now that you’ve got your gross profit, you have all the data you need to find your profit margin
Gross Profit ÷ Total Revenue = Profit Margin
Does that help?
November 1st, 2007 at 7:39 am
Brian
Thank you for the quick response. Your answer was very helpful
November 9th, 2007 at 9:53 am
What is the desired margin for a retail product? If the retail price is 4.99 - what can I expect my product’s acceptable whole cost to be?
November 9th, 2007 at 11:44 am
To be more concise - what do retailers like the drug chains, etc expect their margin to be and if they see the price at $4.99 retail - what should my wholesale cost be to them based on that desired margin? Thanks for your help.
December 4th, 2007 at 11:31 pm
Hi, Your margin calculator tool is really helpful - thank you for your insight and your help!
If I wanted to do the reverse (calculate the $ price from a % gross margin), how do I do that in Excel?
January 25th, 2008 at 1:39 pm
Hi, the examples are very good. However, how do you calculate margin when you have a loss? e.g. I bought a share at $100 and sold at $80. Is my margin (-20/80), or, (-20/100)?
January 25th, 2008 at 1:44 pm
I’m not sure if you would calculate margin for a loss. I would guess that you would just record the percentage loss. In your example, 20%
February 6th, 2008 at 1:19 pm
Hi,
The margin calculator is very helpful. I am trying to set up an Excel spreadsheet to calculate suggest retail pricing and I would like to insert a formula to round to the nearest 9. For example my unit cost is $3.17 and applying a distributor margin of 25% and a retail margin of 35% the SRP is $6.50. However, the actual retail shelf pricing should be $6.49. Is there a formula to help calculate this?
February 8th, 2008 at 1:27 pm
Let’s try this again…I think the margin calculator tool is great and have put it to good use already. What I am trying to figure out is an excel formula to help build a suggested retail pricelist (SRP). This would be the pricing that a retailer (Whole Foods for example) would sell the to the consumer at. Normally these SRPs are rounded to the nearest 9, for example 1.49, 2.69, 3.79, etc. I am using the formula of c/(1-m/100) to determine the SRP, but do not know how to get it to round to the nearest 9. C = cost and m = margin
Thanks
April 19th, 2008 at 4:36 pm
Brian,
I like your pricing and profitability chart, I was trying to figure out, however, the formula you used to determine this chart. My product is in the 75% to 85% range and was looking at a way to determine the same. Widget cost is $2.00 and sells for $9.75. Profit margin is 79.49%. With rising fuel costs could impact the cost severely, so any help there would be great. By the way, your profit margin calculator works great!
Thanks
May 29th, 2008 at 9:59 am
Hi Brian
I have got a bit of a brain teaser. How do you calculate sell price when you have your cost and want to plug in a margin of over 100%.
The 1 - Margin part of the formula makes the result incorrect when the Margin goes over 1
May 30th, 2008 at 3:12 am
Hi Brian
Have found a work around, basically I have put a conditional in to account for decimal margins of 1 and over
so in JavaScript it looks like this:
if(actual_margin
May 30th, 2008 at 4:02 am
Hi Brian
I have had a moment of clarity and properly got my head around the problem. Of course a MARGIN of over 100% is impossible as it is a measure of the profit component in relation to the revenue. This of course cannot be over 100%. In laymen’s terms your cost is always in your sale price and your profit can never be more than your income.
The fact that the formula breaks down should really have been the slap round the face to make me realise this, alas not.
Please moderate out my other ramblings
June 29th, 2008 at 6:31 am
hey, if i currently give free transportation fee for each order above usd500 and now my logistics cost increase by 15%, how much i should increase the minimun order quantum that still could enjoy free transportation
Thanks,
July 31st, 2008 at 4:34 pm
I have a database that uses margins above and below 50 which would require two separate formulas, but how do I combine them into one formula? I am better at math than I am at excel
September 29th, 2008 at 6:35 pm
Brian,
Great calculator, thank you very much!
October 10th, 2008 at 9:02 pm
Brian,
I am trying to create a spreadsheet in excel. I know my Cost and I know my Gross Profit Margin. I need a column (formula) that figures the Selling Price…. =sum (blah, blah, blah)…. I for the life of me can’t figure this out. Can you help me out?
October 15th, 2008 at 8:25 am
Hi Brian,
This is exactly what I am looking for,now all I have to do ids figure out how to apply it.:)
Thanks!!!!
December 18th, 2008 at 8:32 am
from where i get free exel inventry software ?
January 7th, 2009 at 6:28 pm
I have a new company and my product should retail for around $14.99 my cost is $2.84 can you tell me what my margin and markup should be? ie: “the formulas”
Thanks,
Mark
January 9th, 2009 at 5:58 am
Hey Brian,
Thank you very much for this awesome xls file.
Please Brian carry on answering questions in above I really enjoying it.
thanks,Ali