What Is a Retail Margin?
A retail margin is the way a product's price is marked up to its limit for retail sale. It takes into account the wholesale cost of the goods and then subtracts this from its sale price. This difference, plus the excise tax and sales tax, is the retail margin of a product.
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Identification
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When a product's price is marked up from production costs, a certain percentage of that cost is added to the base cost of the product. To calculate the actual retail margin, a mark-up percentage is decided, then the cost of the item is multiplied by this percentage to yield a value. This value is then added back to the original cost to come up with the retail selling price.
Function
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To find the retail margin of a product, subtract the original cost price from the marked-up retail selling price, then divide that by the same retail selling price. This answer will be the retail margin percentage. For example, if the wholesale cost to produce a product is $300, and you decide to markup its price by 40 percent for a profit, you would multiply: $300 X 0.40 = $120.
You would then add this value to the original cost of $300: $300 + $120 = $420.
This $420 is the retail price. Now, we have to find out the retail margin of this $120 markup from the $300 wholesale price to the $420 retail price.
To find the retail margin, subtract the wholesale cost from the retail price, then divide the difference by the retail price to find the retail margin percentage. In this example, the retail margin would be 28.57%:
($420 - $300) / $420 = 28.57% retail margin. -
Features
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In calculating the retail margin, there are other factors to consider. Variations of this formula or calculation method are used to find the retail selling price from a given retail margin value, and vice versa. Accountants may also factor in the base overhead factor (BOF) of producing the product. Tables have been developed to help make calculating retail margin a simplified process.
Include all costs associated with bringing that product to market when calculating its retail margin. Include the price of the item, as well as its shipping costs. Include the materials' cost, the overhead and the labor expense for producing that product, as you do not want these values to take away from the profit. This will yield a true and comprehensive wholesale cost of the product.
Types
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When products are purchased from wholesale distributors, their earnings from the transaction come from a trade discount. A trade discount is an amount added to the wholesale price, in addition to the percentage added for the retail margin. Therefore, it is the wholesale price, the retail margin and the trade discount that are added together to equal the retail price of an item for market. A trade discount is the method used to extract earnings from wholesale product processing. For example, the warehousing and shipping of the product are additional functions that are funded through the trade discount.
Considerations
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The retail margin is essential to retailers because it helps them see the actual value of their investments. Retailers can calculate the exact amount that they expect to earn on a product by finding the desirable retail margin. In retail sales, retailers may use cost-plus pricing or manufacturer's suggested retail pricing.
Cost-plus pricing is easy to use for many retailers. They can simply take the wholesale value and then add to that price the amount that they want to earn. Calculating the retail margin, in this instance, will show retailers either the percentage value of their chosen retail price, or the actual retail price of the profit percentage that they want to make.
The manufacturer's suggested retail price (MSRP), however, is the retail price that a manufacturer expects or suggests that the product should sell for. Retailers who choose this option simply price the products by the MSRP. One drawback to the MSRP, however, is that if the wholesale price increases, due to the economy or low product supply, then the retail margin will have to decrease in order to stay at the manufacturer's suggested retail price.
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Resources
- Photo Credit Martin Eagle, VersaStone Industries
