Margin (on sales) is the difference between selling price and cost. This difference is typically expressed either as a percentage of selling price or on a per-unit basis. Managers need to know margins for almost all marketing decisions.
Margins represent a key factor in pricing, return on marketing spending, earnings forecasts, and analyses of customer profitability. In a survey of nearly 200 senior marketing managers, 78% found percentage margin and 65% found unit margin very useful.
The purpose of the margin metric is to determine the value of incremental sales, and to guide pricing and promotion decisions. Margin on sales represents a key factor behind many of the most fundamental business considerations, including budgets and forecasts. All managers should, and generally do, know their approximate business margins. Managers differ widely, however, in the assumptions they use in calculating margins and in the ways they analyze and communicate these important figures.
A fundamental variation in the way people talk about margins lies in the difference between percentage margins and unit margins on sales. The difference is easy to reconcile, and managers should be able to switch back and forth between the two.
What is a unit? Every business has its own notion of a unit, ranging from a ton of margarine, to 64 ounces of cola, to a bucket of plaster. Many industries work with multiple units. Marketers must be prepared to shift between varying units depending on the decision to be made.
Unit margin ($) = Selling price per unit ($) – Cost per unit ($)
Percentage margin (%) = 100 x Unit margin ($) ÷ Selling price per unit ($)
Gross margin is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).
Gross margin can be expressed as a percentage or in total dollar terms. If the latter, it can be reported on a per-unit basis or on a per-period basis for a company.
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.