“Retail margin” is the gross margin a retail business receives when selling goods. It is the difference between retail price and the costs of goods sold. To achieve strong margins, retailers must minimize acquisition costs and optimize perceived quality among consumers.
The formula for the calculations is sales price of an item minus COGS, divided by the sales price, multiplied by 100. If you sell an item at $20 and paid $10 to acquire it and sell it, your retail margin is $10 divided by $20, or 50 percent. Retail products have variable margins, even within the same store or department.
Retail Margin And Markup Table
This table is designed to assist in converting the different methods of arriving at a retail price. Use the multiplier on cost to achieve the desired margin. For example, to achieve a 33.33% margin use a 150% (1.50) multiplier. Another way to express the difference is that a markup percentage of 50% only yields a margin percentage of 33.33%. Markup, defined as the percentage added to cost to arrive at a selling price, is commonly used to price materials. If you want to mark up an item 20%, you add 20% of the item’s cost to the cost. However, as we have demonstrated, a 50% markup does NOT yield a 50% margin! It is important that you utilize margin and markup properly. Here are the formulae that should help:
Margin
If the cost for an item is $500 and you want a 30% margin:
$500 / (100%-30%)
$500 / (70%)
$500 / .70 = $714.29
COST / (100%-GM%) = SELLING PRICE
A variation taught by many accountants is to also include what is known as base overhead factor (BOF). That ranges from 1.25% to 5%. The same margin with the BOF method, in this case 5%, would be as follows:
$500 / (100%-30%-5%)
$500 / (65%)
$500 / .65 = $769.23
COST / (100%-GM%-BOF%) = SELLING PRICE
In the Margin example above, do NOT make the common error of multiplying by .70! In this case that would yield a selling price of $850.00; nice if you can get it honestly but the greatest probability is that a competitor would undercut your bid at the same (anticipated) margin!
Markup
If an item cost $500 and you want to add a 20% markup:
500 X 20% = $10
$500 + $100 = $600 SELLING PRICE
The actual margin on this item is less than 20%.
($600 – 500) / $600 = 16.67%
Markup to Margin
(RETAIL – COST) / RETAIL
A key factor that influences the margins on retail products is the mark up percentage that the retailer applies to particular goods. Calculating markup is essentially the inverse of calculating retail margin. You subtract your COGS from your desired sales price in the same way, but then divide that amount by your COGS. If your target price is $20 and your COGS are $10, your markup is $10 divided by $10, or 100 percent. Thus, to achieve a 50 percent margin on an item that costs you $10, you need a 100 percent markup.
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