How to Define Retail Margin

Retail margin is not too hard a concept to grasp. In effect it is comparing what you charge for something compared to the amount it cost you to aquire or produce it as a company. There are several ways that retail margin can be viewed by companies and investors alike. These include raw number, and ratios or percentages. This guide will show you how to calculate both of these.

Instructions

Difficulty: Moderate

Things You’ll Need:

• The price you paid for an item
• The price you sold the item for

1. Calculate the price you paid for an item. When calculating that cost, make sure include all the components of that price. That will include the shipping costs you paid for the item as well as the price of the item itself. If you are computing the retail margin for an item you produced, you need to calculate the cost you paid slightly differently. You need to include the cost of the raw materials, the labor cost, and overhead that is attributed to that product. Combine all three of those for the product you manufactured to get your true cost.
2. Calculate the price you charged for the item. This price should be an average over a period of time that you received from the customer. Prices will vary based on sale promotions your company runs. This is why it is best not to use too short of a time period when calculating the price you sold an item for.
3. Subtract the price you paid to manufacture or purchase the product from the price that you received from your customer. This is your retail margin. This raw number can give you an idea of how much you are making in profit per unit that you sell when computing your retail margin.
4. Express the relationship in a ratio to make it more useful. Take the value you determined in step three by subtracting your acquisition or manufacturing cost of the product from the average price you received from your customers, and divide it by your acquisition or manufacturing cost. This will give you a percentage indicating what your retail margin was on the product. This is how most investors will want to see retail margin presented.

Tips & Warnings

• Make sure you include all components of the cost of acquiring or producing the product you sold. The biggest mistake companies make is leaving a component of the cost out of the equation.
• Do not analyze retail margin over too short a time period. For an accurate representation you should compute it over no less than one month.