Pressures on turnover and sales volume often cut into a company’s overall margin, especially as the market slows down. A salesperson who wants to meet both clients’ expectations and their boss’ sales targets is willing to grant larger discounts yet often isn’t aware of how those discounts translate into the company’s profitability. Knowledge of business mathematics can help them make more sales without cutting into their margin.
To answer the question “how can I increase sales without losing my margin?”, you first need to be sure that your sales team understands the difference between a percentage margin and an amount margin, as well as the difference between a margin and a mark-up. Not understanding the difference between a margin and a mark-up is a very common mistake that I encounter when doing consulting projects. It’s not just sales and marketing employees that make that mistake, but business owners too. Meanwhile, these concepts aren’t identical. Knowing the difference and how to calculate these parameters will help you in sales negotiations and may help you better understand your profitability and the results of your sales activities.
Mark-up and margin have one common denominator - expressed as an amount, they have the same value. If our profit on the sale of one item is $20 - both the mark-up and the margin are $20. In both cases, the calculation is based on the same assumptions:
AMOUNT MARGIN = SALE PRICE - PURCHASE PRICE AMOUNT MARK-UP = SALE PRICE - PURCHASE PRICE
The company buys a product for $80 net and it sells for $100 net. The amount margin is therefore $20 net:
$100 SALE PRICE - $80 PURCHASE PRICE = $20 AMOUNT MARGIN
However, with percentage calculations it begins to get more difficult. The percentage mark-up is the ratio of the sale profit to the purchase price (which may be, for example, the price obtained from a wholesaler), while the margin is the sale profit in relation to the sale price.
What will the percentage margin be in this case? We calculate it with the following formula:
PERCENTAGE MARGIN% = (SALE PRICE - PURCHASE PRICE) / SALE PRICE × 100
PERCENTAGE MARGIN% = ($100 - $80) / $100 × 100 = 20%
In this situation, the margin will be 20% because the percentage margin is the ratio of the sale profit to the sale price. Therefore, we divide the $20 mark-up by the sale price of $100 and multiply by 100 to get the percentage.
So, what is the percentage mark-up and how does it differ from the percentage margin? While the percentage margin is the ratio of sale profit to the sale price expressed as a percentage, the mark-up is the ratio of the sale profit to the purchase price, also expressed as a percentage. The formula for the mark-up is as follows:
PERCENTAGE CHARGE% = (SALE PRICE - PURCHASE PRICE) / PURCHASE PRICE × 100
Based on our example:
(SALE PRICE $100 - PURCHASE PRICE $80) / PURCHASE PRICE $80 × 100 = 25%
As you can see in the example above, the mark-up is a higher percentage (25%) than the percentage margin calculated using the same values (20%). You should know that a positive mark-up expressed as a percentage will always be higher than a positive percentage margin - we divide the profit by the purchase price, which is lower than the sale price used when calculating the margin. For negative percentages, these relationships will be opposite - the mark-up will be lower than the margin.