Decoding margin percentage in Product Sale reports

Decoding margin percentage in Product Sale reports

Margin percentage is a financial metric that represents the percentage of a product's selling price that is left for profit after deducting the costs involved in labor, manufacturing, raw materials, and much more. It is a measure of how much of the selling price contributes to profit rather than covering costs.

How can it help me?

Knowing your product's margin percentage can help you in several ways.

Pricing strategies

Margin percentage can help you understand whether your product makes a profit excluding the cost involved (cost price).

For example, if your product's margin percentage is 40 and its selling price is 100, the profit will be 40. This information can help you define sustainable prices for your products and avoid underpricing (which erodes profitability) or overpricing (which may reduce competitiveness).

Product profitability

Discounts and promotions are provided to increase product sales. Knowing the margin percentage allows you to determine the discount percentage for products.

For example, a product with a high margin allows you to provide discounts without incurring losses. This information can help you define the discount percentage for your products, resulting in more sales without incurring loss.

Competitive analysis

Compare your margin percentage to the market norm to see whether your pricing is competitive enough.

For example, if the market average margin is 35% and your margin is 25%, this could indicate inefficiencies or missed price possibilities. Using this information, you can reevaluate your pricing and remain competitive.

Tracking inefficiencies

One of the primary causes for a declining margin percentage is operational inefficiencies.

For example, if raw material costs rise but selling prices remain constant, the margin percentage will drop. This information can encourage you to evaluate supplier costs, production methods, or waste management and resolve it to avoid losses.

How is it calculated?

To calculate a margin percentage for an item, we need certain values.

Selling price: Price at which the product is sold.
Cost price: Amount spent to produce or procure the product. It includes expenses like raw materials, labor, transportation, and manufacturing costs.
Idea
                                      Selling Price - Cost Price 
Margin Percentage =   ---------------------------     x 100
                                                Selling Price 
Idea
                    Profit =  Selling Price - Cost Price
Idea
                                          Profit
                          MP = -----------------  x 100
                                      Selling Price
Let's see how this calculation works with some sample scenarios.

Scenario 1: Sales of tax-inclusive items

Zylker grocery store sells potatoes for 100/kg, since the cost price is 88/kg. All the items in their store are tax inclusive with a tax rate of 12%.

Info
To calculate the margin percentage for this item, we need to exclude the tax amount from the selling price, as profit should be based on the price before tax.
Selling price (Inclusive of tax) = 100 INR
Cost price = 88 INR                                                           
Idea
                                                          Selling Price (Inclusive of tax)
Selling Price (Exclusive of tax) =   ----------------------------------
                                                                  (1 + Tax rate / 100)
                                                                   100 
                              Selling price = -------------------------
                                                             (1+12/100)

                                                                  100
                               Selling price = -------------------------
                                                                (1+0.12)

                               Selling price = 100 / 1.12

 Selling Price (Exclusive of tax) = 89.29

Idea                                Profit = Selling Price (exclusive of tax) - Cost Price
                                          Profit = 89.29 - 88
                                          Profit = 1.29
Idea
                                                                                 Profit 
                    Margin Percentage = --------------------------------------- x 100
                                                            Selling Price (Exclusive of tax) 
                                                                  1.29 
                                               MP =   ------------------ x 100
                                                                  89.29

                                                                129
                                               MP =   ---------------- 
                                                                89.9
                   
                    Margin Percentage = 1.44

The margin percentage of potatoes sold at this grocery store is 1.44%.

Scenario 2: Sales of tax-exclusive items

Zylker mart sells pencils for 10 INR each, with a cost price of 7 INR per piece. All items in the store are priced exclusive of tax, which is applied at a rate of 18%.

Info
Since the tax amount is added at checkout, it is not included in the listed selling price. Therefore, the selling price is used directly for calculations.
Selling price = 10 INR
Cost price = 7 INR
Idea   Profit  = Selling Price - Cost Price
                                         Profit = 10 - 7
                                         Profit = 3
Idea
                                                             Profit 
                 Margin Percentage  = ----------------- x 100
                                                        Selling Price
                                                             3
                                             MP = ---------- x 100
                                                            10
                 Margin Percentage  = 30

The margin percentage of the pencils sold at this mart is 30%.

Comparing the margin percentages in both scenarios reveals that, regardless of the quantities sold, pencils yield a higher margin than potatoes. This insight can guide stores in refining their pricing strategies to sustain product profitability while remaining competitive in the market.

Hope this clarifies your questions about margin percentage calculations. If you have any further doubts about this or any other calculations, feel free to share them as replies to this post.