How to calculate the margin on a product: the formula for successful sales

The product margin is a key point in planning pricing and developing a sales strategy for any retail business. 

What is a margin?

A trade margin is the difference between the cost of purchasing goods by a seller and their selling price to a buyer. In simple terms, the markup is an additional amount of money to the price of the goods for which the seller sells them. In percentage terms, it is the difference between the purchase price of the goods and their sale price.

Before deciding what the markup should be, an entrepreneur should consider the following:

• understand that the final price of a product must be adequate and competitive, 

• be able to correctly calculate the prices at which competitors purchase products,

• categorize products and find out which products are the most popular in the selected niche and which are in demand in a particular region.

 If it is a seasonal product, determine what period of the year the demand for it increases.

Which products are better to mark up? 

Entrepreneurs often wonder how to make a markup on goods. We'll talk about this in more detail below. 

It is important to understand which products can be charged the highest markup and which ones the lowest. The size of the margin depends on many factors:

• product niche and from the product itself,

• the amount to cover all costs (storage, delivery),

• taxes (tax % is also added to the margin to avoid losses), 

• the level of demand for product categories.

Practice shows that a high margin should be made on narrow niche products that are little known to consumers, but for which demand is constant. It is on such goods that profits are made:

• craft goods produced in small quantities by small companies. These can be expensive canned and semi-finished products, various specific pastes and jams made according to author's recipes, healthy organic sweets that are in demand among a small share of the audience, 

• related products to the main ones — sauces, snacks, spices, condiments,

• ready-made breakfasts, energy drinks, superfoods, vegan food products, 

• new products — you can always make a markup on them, but only for a short period, as customers can compare prices and find a more favorable option,

• VIP goods with a high price: branded or exclusive items, Apple products, jewelry, elite drinks, expensive cosmetics and accessories, luxury fashion clothing, handmade products. The margin on such goods can be as high as possible. 

  Goods that can make a good margin are in stable demand among consumers and do not go out of style.

How the cost depends on the product category

How to calculate the margin for a product?

We mentioned above that an entrepreneur should set competitive prices in the store. To do this, it is crucial to choose the right supplier and correctly calculate the purchase price of goods and its margin. 

How to determine the markup for a product?

There are several formulas for calculating the final cost of a product and the percentage of markup: 

1. How to determine the sales price (selling or realization price).

If you know the approximate markup percentage, to determine the selling price, multiply the cost of goods (purchase price) by the markup percentage, then add the resulting number to the purchase price.
Example. 

You bought perfume from a supplier for $50, and the markup on cosmetics is 40%, so: 50*40% = 20, the price at which you will sell the products will be 50 + 20 = $70.

2. How to calculate the markup on a product? 

The classic formula for quantifying margins:

Markup = selling price — cost of goods — expenses

Determining the percentage of the markup 

Let's say you've found a supplier, calculated logistics costs, compared competitors' sales prices, and you need to find a way to calculate the percentage of the markup. 

The margin calculator looks like this: 

Markup = (selling price — cost) / cost * 100%.

In the example of perfume, the markup will be: (70 — 50) / 50*100% = 40%.

This way, you can estimate whether it is profitable for you to set this particular selling price and margin on your products, or whether it will lead to losses and you should increase it? Or maybe it's better to change the product to a less competitive one? 

4. How to make a markup on a product. Other formulas 

To determine the percentage of the markup, you can divide the final cost of the product by the cost price, subtract the unit, and multiply by 100%. 

So, the perfume cost $70, the cost price was $50. Markup: (70 / 50-1)*100% = 40%.

5. How to determine the initial price of the supplier's goods? 

Any entrepreneur is interested in purchase (or wholesale) prices, because a supplier can play a double game: sell the same product to you and competitors at different prices. 

If you know the retail price at which your competitor sells the product and the margin to determine the initial price, you need to add one to the margin and divide the final selling price by this number.
Example.

A competitor sells a T-shirt for $20. The contract with the supplier stipulates that you cannot make a markup of more than 60%. To calculate the initial price, you need to: 

1. 60%+100%= 0,6+1=1,6 

2. 20/1,6 = $12,5

That is, the initial price of the jersey at which the competitor purchased it from the supplier was $12.5. 

To be competitive, you shouldn't overuse your margins — neither too low nor too high. The size of the margin depends on many factors, including the category of goods, associated costs, and most importantly, the profit you want to make. 

The best option that works in any situation is to provide a high level of service, a quality product, and interesting and profitable offers for customers. In the long run, it is to develop the image of your store or brand so that customers come back to you again and again, even if your prices are high.

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