If you’re new to the world of retail and feeling a little lost in the jargon, or maybe you’re just in need of a quick refresher, our jargon-busting series of blogs will have you “Speaking Retail” in no time.
Other articles in the series cover common acronyms and terms relating to measuring and managing stock, markdown and sales performance. In this article, we’re talking all-things margins…
So, first things first: what is a margin?
What is a retail margin?
Simply put, “margin” is another word for “profit”.
For most businesses, the critical number is the monetary margin value. But margin is also often expressed as a percentage (%) – which is useful for comparative purposes and in some industry sectors which have a high cost base, is the key performance indicator (KPI).
Why are margins so important to retailers?
Margins are important to retailers because planning margin pre-season and monitoring it in-season means that you can make sure that your trading profit covers your costs, and your business is viable.
Whilst all retailers measure and monitor margin, the calculations, terms and names used often vary quite significantly – particularly with systems where the calculations may be different or more complex.
In this post, we’re going to look at the most important and common margins – buying margin and selling margin – and how to calculate them. We’ll also define 3 other retail margins that you need to be aware of.
What is a buying margin?
Also known as intake margin or gross margin, a buying margin is a measure of the difference between the cost of goods and the tax exclusive value of the original (or initial) selling price. The calculation gives a margin % and also a monetary value.
How to calculate a buying margin
To calculate a buying or intake margin, you can use the following equation:
((Tax exclusive selling price – cost of goods) ÷ Tax exclusive selling price) x 100
So, if a product sells for £20, has a sales tax rate (VAT) of 20% and the cost to the supplier is £6.50.
The margin will be £10.17 or 61%.
What is a selling margin?
Selling margin refers to the profit achieved after taking into account sales tax, the cost price paid to the supplier and any markdowns or promotions that have reduced the selling price.
If every sale is made at the full, original retail price this will be the same as the buying or intake margin, but usually there are some discounts across the life of a product.
A selling margin can sometimes be referred to as NAM (which stands for net achieved margin), NAMAD (which is net achieved margin after discount), exit margin or PPMD (which is profit post-markdown).
How to calculate selling margins
To calculate a selling or exit margin you use the same calculation, however the tax exclusive selling price is now the reduced price paid by the customer, not the original price. The cost of goods remains the same.
((Tax exclusive reduced selling price – cost of goods) ÷ Reduced price paid by customer) x 100
So, taking the previous example, if it is now selling for £15 – a reduction of £5 on the original selling price – the margin will be £6.00 or 48%.
What other types of retail margins are there?
Although buying margins and selling margins are the most common, there are some other margins used in retail that you may need to be aware of:
- Commitment margin: A commitment margin is the margin on confirmed intake or orders that have been placed but not yet delivered from the supplier to the retailer.
- Stock margin: A stock margin is the margin of the stock in the business at any one point in time. This will be a rollup of all the different product margins across the range according to the amount of stock held of each one.
- Rolling margin: A rolling margin combines the margin achieved on sales with the margin on current stock. It changes all the time and can be hard to calculate without lots of granular data or a sophisticated system, so most retailers estimate it by applying margin rates based on a range mix.
What is a good profit margin for retailers?
The profit margin you need to achieve is dependent on several factors, and what a ‘good’ profit margin looks like will vary from traditional brick-and-mortar stores to those of eCommerce retailers.
It will also vary quite considerably based on the sector within which the retailer operates. For example, retailers who sell a high mix of branded products are likely to operate on a lower margin than one who sells mainly their own brand.
We can also consider how the margin retailers achieve helps to manage their risk. It is typical for retailers who sell high-risk products with less well-established shopping patterns to aim for high margins to help them manage the stock if the sales do not come through.
Conversely, retailers of everyday staples can operate on lower margins.
Other impacts on margin
So far, we have talked about the margins made as a result of the buying and selling of products – the margins that Buyers and Merchandisers plan and track. They also manage markdown decisions which erode the buying margin – but as well as this, there are other costs a retailer incurs which need to be covered.
This is often the role of Finance who manage the P&L (profit and loss) accounts for the business. Whilst there is no need for a deep understanding of financial management accounting, it’s important that Buyers and Merchandisers have a working understanding of the key differences.
Here are some of the key points to note:
Above/below the line
Alongside all the terms we have covered, margins are often simply known as gross or net, or sometimes
more informally as ‘above the line’ (ATL), and ‘below the line’ (BTL).
This is referring to the product margins we have covered already versus the final profit a retailer makes once all the central costs have also been deducted (things like salaries, store costs, office buildings, utilities & taxes, marketing costs and so on, as well as more specific budgets for things like travel and training).
Asset value
One key thing to note is the way the asset of stock is valued by Buyers & Merchandisers compared with Finance.
Historically it was more common for the product team to value stock at the latest retail selling price and its associated margin, whereas Finance attach a value to the cost of the goods based on their age or length of time in the business which depreciates over time.
The two values are often therefore different and support the need for accurate coding of stock as a critical decision and not just an admin task
However, there are now many retailers who work entirely on cost-based retailing and in this case both Finance and Product teams will value stock in cost terms.
Understand the costs in your business
The key point is that Buyers & Merchandisers have a working understanding of the additional costs the retailer needs to bear to ensure that the product margins are sufficient to cover them. They should be able to find out from Finance the minimum trading margin needed to cover the operating costs before any final profit can be made.
Learn more about margins and price management
If you found this taster on margins useful, you might want to check out our Retail Jargon Toolkit which covers over 300 retail terms and acronyms, along with bite-sized video explainers for 14 essential retail calculations including Margins, Markdowns, OTB, BTA, Cover and so much more.
Or, if you’ve already got the basics covered, you might be interested in taking our Retail Price Management course which covers the best practice approach to setting retail prices and handling promotions and markdowns.
You can find full details of all our expert-led courses and classroom-based workshops in the First Friday Training Academy.
