Contents
- What is margin?
- How to calculate margin?
- Margin and profitability
- Types of margin
- Why is net profit margin important?
- What margin is considered good?
What is margin?
Margin, or margin, represents the difference between the selling price of a product and its cost. This indicator is an important metric in business, as it allows understanding how much money the company makes after selling the product, taking into account all expenses. Although the term "margin" is often used in various fields such as banking, insurance, and the stock market, in this article, we will focus on its meaning in the context of selling goods and services.
How to calculate margin?
The margin can be calculated using a simple formula:
Margin = Selling Price – Cost Price
Here, the cost price includes all variable costs associated with producing or acquiring the product. For example, if a company purchased sneakers for 1200 rubles per pair and sold them for 2000 rubles, the margin would be:
2000 - 1200 = 800 rubles.
However, in real conditions, calculating margin can be more complex. For example, if a company produces the product itself, it needs to account for additional variable costs such as:
- cost of raw materials;
- resource expenses for operating the equipment;
- percentage of wages for production volume;
- packaging and logistics expenses.
Fixed costs, such as employee salaries and rent, are not included in the cost price, as they do not depend on the volume of production.
Margin and profitability
Margin is also useful for calculating other important metrics, such as LTV (lifetime value of a customer). The formula for calculating LTV is as follows:
LTV = Average Check × Average Number of Orders per Month × Average Duration of Customer Relationship × Average Margin
However, margin as an absolute indicator may not always reflect business effectiveness. For example, a constant increase in margin may mask rising variable costs, questioning the actual effectiveness of operations. Therefore, it makes sense to also calculate margin ratio, which represents the ratio of margin to revenue:
Margin Ratio = Margin / Revenue × 100%
Types of margin
In accounting and finance, three main types of profit, or margin, are distinguished:
- Gross Profit (Gross Margin) - total revenue minus the cost of goods sold;
- Operating Profit (Operating Margin) - revenue minus the cost of goods sold and operating expenses;
- Net Profit (Net Margin) - revenue minus all expenses, including interest and taxes.
Each of these indicators is important for assessing the financial condition of a company. For example, the gross profit margin shows what percentage of income remains after covering direct expenses, while the operating profit margin reflects the remainder after deducting operating costs.
Why is net profit margin important?
Net profit margin is a key metric that helps evaluate business effectiveness. Low values may indicate excessively high operating costs or pricing errors. Additionally, the dynamics of margin across different areas allows for more effective resource allocation and goal setting for further development. Knowledge of net margin is also useful for investors, as it reflects whether a business can cover its expenses and generate profit.
What margin is considered good?
Determining the optimal value of net profit margin is challenging, as it depends on the specific industry and characteristics of the company. In 2024, for example, the average net profit margin in the banking sector is 30.89%, while in electronics, it is -3.05%. Generally, the higher the margin, the better; however, for an objective assessment of business effectiveness, it is advisable to compare indicators with competitors and companies operating under similar conditions.