The AssetBrief margin calculator will not only calculate your margin based on your cost and price (or revenue), it will also provide you with various markup scenarios.
For example, if you want to increase your margin, how much do you need to increase your markup? If you want to hit a certain profit, what markup should you use? In addition, what happens to your profit as you change your margin?
These scenarios help you understand what levers you can pull, and how hard you need to pull them to achieve your profit goals.
For the mathematically inclined the margin calculation looks like this:
Because the difference between price and cost is profit, we can also write the margin formula as:
Margin is a percentage that is always less than or equal to 100%. When margin is 100%, cost is $0. When margin is 0%, price is equal to cost and profit is $0. Margin falls into the negative territory when you cannot recoup your costs and must sell at a price that is lower than cost.
If you are interested in understanding how markup is calculated, the formula looks like this:
The markup is a percentage that represents how much you will charge above costs. If the price is the same as cost, then the markup is 0%. If the price is double the cost, the markup is 100%.
Let's take an example to illustrate how margin, profit, and prices are calculated.
A bar of soap costs $5 to produce. This includes the cost of supplies such as oils, fragrance, and more. You decide that you will markup the soap at 100%. What is your price, profit, and margin?
Let's look at price first.
Price is $10. What is profit?
Profit is $5.
Now let's look at margin.
Margin is 50%.
Margin measures how efficiently cost is converted into sales. A high margin means that this process is very effective. For every dollar spend on costs, a lot is gained from sales. A low margin means that a lot of money is being spent but you are not getting a lot for it.
The terms margin, gross margin and profit margin are often blurred together. These terms differ primarily because of what is being included in costs. All of them use the same price or revenue figure. Our calculator is very simple and just looks at revenue and costs. You can use any cost figure you want.
Gross margin looks only at the difference between price or revenues and the cost of goods sold or COGS.
What is COGS? COGS is the cost directly required to produce what you are selling, whether this is a tote bag, a bar of soap, a book, etc. "Directly" is important here because COGS does not include overhead such as the cost of paying for accounting software, office furniture, or legal fees. That's because accounting software, furniture, and legal advice are not directly used for the production of bags, soap, and books.
One way to think about COGS is to consider what costs you need to produce one more item. For example, to make one more tote bag, you would need fabric, thread, glue, etc. These costs are included in COGS.
Gross margin profit is the dollar difference between price and COGS. Gross margin is the percentage difference.
Profit margin, also known as net profit margin, includes all of your costs, including COGS and overhead costs such as legal fees, office furniture, and accounting software costs. Every single expense is included, including taxes. If you are a business owner, this is how much money left to go into your pocket.
Profit or net profit is the dollar difference between price and all expenses. Profit margin is the percentage difference.
Gross margins and profit margins vary greatly by industry. A good margin is one that is higher than average in your industry. Below is a chart of gross margins and profits margin by industry based on financials published by publicly traded companies. As you can see, the gross margin can range from around 10% to over 70%. The net profit margin ranges from around negative 10% to 30%. These ranges can help you gauge whether your margins are relatively good or if they can be improved.
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