Sales margins give companies the ability to assess the profits they generate from their products and services, and they have an impact on executive choices and long-term company strategy. By understanding sales margins, businesses can compare their current sales figures to prior sales and the sales performance of other businesses in related industries.
In this post, we provide an answer to the question “What is sales margin?”, explain the key difference between sales margin and gross profit margin, and offer a formula for sales margin calculation, along with strategies that will help you improve your entire business profitability. Let’s begin.
What is a Sales Margin?
The sales or contribution margin is the amount of money a business makes from the sale of a product or service. It is obtained after totaling all expenses related to providing the goods, including labor, production, and material costs.
The outcomes of sales margin estimates can help business owners assess the effectiveness of different product lines and determine which of their products are most and least profitable. Sales margins also play a significant role in business projections and budgets, retail pricing, and promotional decisions.
Difference Between Sales Margin and Gross Profit Margin
Bots sales gross profit margin and sales margin show how profitable a certain product is by comparing its manufacturing costs and revenue. However, although they’re both crucial financial metrics, sales margin and gross profit margin measure different things:
- Gross profit margin determines the total sales revenue for all goods sold after accounting for all expenditures associated with the creation and manufacture of the products. In addition, it displays the manufacturing and sales results for the company.
- Sales margin measures the profit from a single or several product transactions over a given time period. Additionally, it assesses the business expenses associated with producing these specific products.
Why Are Sales Margins Important?
The sales margin is a key indicator of a company’s financial success because it directly relates to business profitability.
The sales margin is the main factor influencing whether or not merchants would accept the goods. It includes the commission or margin paid to retail stores, wholesalers, and occasionally even resellers.
The product’s sales margin is primarily determined by the product’s pricing. The higher the sales margin, the better it is for the company. On the other side, a higher retail price would come from a more senior sales margin, which might disappoint the customers. After the product is sold, a decent amount of cost must be recovered, covering all associated costs and leaving a fair sales margin.
How to Calculate Sales Profit Margin
In addition to the sales margin for a single product, you can also calculate the sales margin for several products. By establishing quarterly, monthly, or even yearly sales margins, businesses can evaluate the viability of sales products and allow comparative price analysis of items over time.
To determine the sales profit margin, you subtract all expenses related to the sale of the item from its selling price. The selling price is then simply divided by these expenses. Depending on the type of business, several factors will go into this calculation, but they usually include expenditures associated with providing products and services, income, commission, sales discounts, and sales margin.
Follow these steps to get the sales margin:
- Calculate the total revenue from product sales
- Deduct all manufacturing-related costs from the entire revenue to arrive at the net profit
- Finally, divide the net profit by the total revenue to obtain the sales margin.
Use the sales margin formula, T – C = NP/T, where:
- T = total revenue
- C = product cost
- NP = net profit
5 Strategies for Improving Your Sales Profit Margin
Every business keeps an eye on its bottom line and is consequently aware of its sales profit margin. Below, we are taking a closer look at how to improve your sales margin.
1. Review your processes and strategies
Improving the crucial processes and areas of your business that may be preventing you from reaching your full potential is fundamental to raising your sales profit margin. And as you can guess, you cannot achieve this if you are unaware of the points and procedures involved.
You must carefully consider all of the important aspects that affect your ability to generate income or control production costs, including how you spend money, how you produce your goods, and how you acquire customers.
Examine your expense reports to identify any unnecessary expenditures. Find areas in your sales process where a high amount of prospects tend to lose interest. Review your marketing techniques and service architecture to determine whether you can improve how you acquire and retain customers. In addition, conduct a competitive analysis to find out how other businesses in your industry are doing. This is the best way to find out what you are doing incorrectly and make an effort to fix it.
2. Remove products that don’t sell well
Having a smaller selection of goods in stock will free up your time and energy for the most important products and decrease the overall workload of your business.
Identify your best-selling products and focus on manufacturing and promoting those products. In addition, stop producing and promoting products that are less profitable. By doing this, you’ll be able to focus your time and efforts on the products that will bring in the most money.
3. Increase prices strategically
If you can strategically and effectively raise product prices without losing too many of your customers, you will increase income on every sale you make, which will immediately increase your sales margin. However, pulling off a strategic increase in price can often be easier said than done.
Depending on the industry, market position, product portfolio, and external factors like the general economic environment, different businesses will have different optimal retail pricing strategies.
If you want to identify the strategy that will work best for your business, you will need to do in-depth market research, and competitive benchmarking, strategically construct and comprehend your consumer personas, and be ready to make mistakes and learn from them.
4. Try upselling and cross-selling
Upselling is a sales strategy where customers are moved from inexpensive products to more expensive, better-quality, or feature-rich alternatives. However, in order for this strategy to be successful, you must ensure that your customers are aware of the benefits of purchasing your more expensive products.
Cross-selling, on the other hand, is a strategy used to persuade clients who initially came in to buy one thing to also buy other, related items. Cross-selling is a great way to increase your sales and increase customer satisfaction.
5. Reduce your operating expenses
If you want to increase your sales margin, start by reducing your operating expenses as much as you can. There are many steps you can take to lower your operating expenses, such as:
- Reducing labor costs by cutting unnecessary staffing
- Letting go of expensive office space if the majority of your team can work remotely
- Reducing advertising costs where possible
- Cutting on overhead expenses
- Reducing customer servicing costs by using customer support software
- Paying invoices as soon as possible to take advantage of vendor discounts
Another option is to find solutions to automate tedious daily tasks that burden your personnel. This will enable you to free up your staff members’ time so they can concentrate on their important duties and, as a result, lower operating costs.
The Bottom Line
Investors and analysts use a variety of metrics to help them assess a company’s financial stability and health, and sales margin is one of them. Sales margins have an impact on business decisions, pricing strategy, and the marketing of goods and services, and are crucial for forecasting sales and setting budgets. Companies can plan for seasonal changes and yearly sales variation patterns by understanding their sales margins.
Increasing your sales profit margin is the best way to achieve your growth goals and business success, and taking some of the above-mentioned tactics into consideration can be of great help.