Gross margin - Wikipedia

Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Grossmargin FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Markupvs.GrossMargin(byAdriánChiogna) Grossmarginisthedifferencebetweenrevenueandcostofgoodssold(COGS),dividedbyrevenue.Grossmarginisexpressedasapercentage.Generally,itiscalculatedasthesellingpriceofanitem,lessthecostofgoodssold(e.g.productionoracquisitioncosts,notincludingindirectfixedcostslikeofficeexpenses,rent,oradministrativecosts),thendividedbythesamesellingprice."Grossmargin"isoftenusedinterchangeablywith"grossprofit",howeverthetermsaredifferent:"grossprofit"istechnicallyanabsolutemonetaryamountand"grossmargin"istechnicallyapercentageorratio. Grossmarginisakindofprofitmargin,specificallyaformofprofitdividedbynetrevenue,e.g.,gross(profit)margin,operating(profit)margin,net(profit)margin,etc. Contents 1Purpose 1.1Percentagemarginsandunitmargins 1.2Definitionof"Unit" 1.2.1Useinsales 1.2.2Markup 1.2.2.1Grossmargin(asapercentageofrevenue) 1.2.3Convertingbetweengrossmarginandmarkup(grossprofit) 1.2.4Grossmargintoolstomeasureretailperformance 1.2.5Differencesbetweenindustries 2References Purpose[edit] Thepurposeofmarginsis"todeterminethevalueofincrementalsales,andtoguidepricingandpromotiondecision."[1] "Marginonsalesrepresentsakeyfactorbehindmanyofthemostfundamentalbusinessconsiderations,includingbudgetsandforecasts.Allmanagersshould,andgenerallydo,knowtheirapproximatebusinessmargins.Managersdifferwidely,however,intheassumptionstheyuseincalculatingmarginsandinthewaystheyanalyzeandcommunicatetheseimportantfigures."[1] Percentagemarginsandunitmargins[edit] Grossmargincanbeexpressedasapercentageorintotalfinancialterms.Ifthelatter,itcanbereportedonaper-unitbasisoronaper-periodbasisforabusiness. "Margin(onsales)isthedifferencebetweensellingpriceandcost.Thisdifferenceistypicallyexpressedeitherasapercentageofsellingpriceoronaper-unitbasis.Managersneedtoknowmarginsforalmostallmarketingdecisions.Marginsrepresentakeyfactorinpricing,returnonmarketingspending,earningsforecasts,andanalysesofcustomerprofitability."Inasurveyofnearly200seniormarketingmanagers,78percentrespondedthattheyfoundthe"margin %"metricveryusefulwhile65percentfound"unitmargin"veryuseful. "Afundamentalvariationinthewaypeopletalkaboutmarginsliesinthedifferencebetweenpercentagemarginsandunitmarginsonsales.Thedifferenceiseasytoreconcile,andmanagersshouldbeabletoswitchbackandforthbetweenthetwo."[1] Definitionof"Unit"[edit] "Everybusinesshasitsownnotionofa'unit,'rangingfromatonofmargarine,to64ouncesofcola,toabucketofplaster.Manyindustriesworkwithmultipleunitsandcalculatemarginaccordingly…Marketersmustbepreparedtoshiftbetweenvaryingperspectiveswithlittleeffortbecausedecisionscanberoundedinanyoftheseperspectives."[1] Investopediadefines"grossmargin"as: Grossmargin(%)=(Revenue−Costofgoodssold)/Revenue[2] Incontrast,"grossprofit"isdefinedas: Grossprofit=Netsales−Costofgoodssold+Annualsalesreturn orastheratioofgrossprofittorevenue,usuallyasapercentage: Grossmarginpercentage = Revenue − COGS Revenue × 100 % {\displaystyle{\text{Grossmarginpercentage}}={\frac{{\text{Revenue}}-{\text{COGS}}}{\text{Revenue}}}\times100\%} Costofsales,alsodenominated"costofgoodssold"(COGS),includesvariablecostsandfixedcostsdirectlyrelatedtothesale,e.g.,materialcosts,labor,supplierprofit,shipping-incosts(costoftransportingtheproducttothepointofsale,asopposedtoshipping-outcostswhicharenotincludedinCOGS),etc.Itexcludesindirectfixedcosts,e.g.,officeexpenses,rent,andadministrativecosts. Highergrossmarginsforamanufacturerindicategreaterefficiencyinturningrawmaterialsintoincome.Foraretaileritwouldbethedifferencebetweenitsmarkupandthewholesaleprice. Largergrossmarginsaregenerallyconsideredidealformostbusinesses,withtheexceptionofdiscountretailerswhoinsteadrelyonoperationalefficiencyandstrategicfinancingtoremaincompetitivewithbusinessesthathavelowermargins. Tworelatedmetricsareunitmarginandmarginpercent: Unitmargin ( $ ) = Sellingpriceperunit ( $ ) − Costperunit ( $ ) {\displaystyle{\text{Unitmargin}}(\$)={\text{Sellingpriceperunit}}(\$)-{\text{Costperunit}}(\$)} Margin = Unitmargin ( $ ) Sellingpriceperunit ( $ ) × 100 % {\displaystyle{\text{Margin}}={\frac{{\text{Unitmargin}}(\$)}{{\text{Sellingpriceperunit}}(\$)}}\times100\%} "Percentagemarginscanalsobecalculatedusingtotalsalesrevenueandtotalcosts.Whenworkingwitheitherpercentageorunitmargins,marketerscanperformasimplecheckbyverifyingthattheindividualpartssumtothetotal."[1] Toverifyaunitmargin($):Sellingpriceperunit=Unitmargin+CostperUnit Toverifyamargin(%):Costas %ofsales=100%−Margin % "Whenconsideringmultipleproductswithdifferentrevenuesandcosts,wecancalculateoverallmargin(%)oneitheroftwobases:Totalrevenueandtotalcostsforallproducts,orthedollar-weightedaverageofthepercentagemarginsofthedifferentproducts."[1] Useinsales[edit] Retailerscanmeasuretheirprofitbyusingtwobasicmethods,namelymarkupandmargin,bothofwhichdescribegrossprofit.Markupexpressesprofitasapercentageofthecostoftheproducttotheretailer.Marginexpressesprofitasapercentageofthesellingpriceoftheproductthattheretailerdetermines.Thesemethodsproducedifferentpercentages,yetbothpercentagesarevaliddescriptionsoftheprofit.Itisimportanttospecifywhichmethodisusedwhenreferringtoaretailer'sprofitasapercentage. Someretailersusemarginsbecauseprofitsareeasilycalculatedfromthetotalofsales.Ifmarginis30%,then30%ofthetotalofsalesistheprofit.Ifmarkupis30%,thepercentageofdailysalesthatareprofitwillnotbethesamepercentage. Someretailersusemarkupsbecauseitiseasiertocalculateasalespricefromacost.Ifmarkupis40%,thensalespricewillbe40%morethanthecostoftheitem.Ifmarginis40%,thensalespricewillnotbeequalto40%overcost;infact,itwillbeapproximately67%morethanthecostoftheitem. Markup[edit] Theequationforcalculatingthemonetaryvalueofgrossmarginis: Grossmargin=Sales−Costofgoodssold Asimplewaytokeepmarkupandgrossmarginfactorsstraightistorememberthat: Percentofmarkupis100timesthepricedifferencedividedbythecost. Percentofgrossmarginis100timesthepricedifferencedividedbythesellingprice. Grossmargin(asapercentageofrevenue)[edit] Mostpeoplefinditeasiertoworkwithgrossmarginbecauseitdirectlytellsyouhowmuchofthesalesrevenue,orprice,isprofit: Ifanitemcosts$100toproduceandissoldforapriceof$200,thepriceincludesa100%markupwhichrepresentsa50%grossmargin.Grossmarginisjustthepercentageofthesellingpricethatisprofit.Inthiscase,50%ofthepriceisprofit,or$100. $ 200 − $ 100 $ 200 ⋅ 100 % = 50 % {\displaystyle{\frac{\$200-\$100}{\$200}}\cdot100\%=50\%} Inamorecomplexexample,ifanitemcosts$204toproduceandissoldforapriceof$340,thepriceincludesa67%markup($136)whichrepresentsa40%grossmargin.Thismeansthat40%ofthe$340isprofit.Again,grossmarginisjustthedirectpercentageofprofitinthesaleprice. Inaccounting,thegrossmarginreferstosalesminuscostofgoodssold.Itisnotnecessarilyprofitasotherexpensessuchassales,administrative,andfinancialcostsmustbededucted.Anditmeanscompaniesarereducingtheircostofproductionorpassingtheircosttocustomers.[clarificationneeded]Thehighertheratio,allotherthingsbeingequal,thebetterfortheretailer. Convertingbetweengrossmarginandmarkup(grossprofit)[edit] Convertingmarkuptogrossmargin grossmargin = markup 1 + markup {\displaystyle{\text{grossmargin}}={\frac{\text{markup}}{1+{\text{markup}}}}} Examples: Markup=100%=1 grossmargin = 1 1 + 1 = 0.5 = 50 % {\displaystyle{\text{grossmargin}}={\frac{1}{1+1}}=0.5=50\%} Markup=66.7%=0.667 grossmargin = 0.667 1 + 0.667 = 0.4 = 40 % {\displaystyle{\text{grossmargin}}={\frac{0.667}{1+0.667}}=0.4=40\%} Convertinggrossmargintomarkup markup = grossmargin 1 − grossmargin {\displaystyle{\text{markup}}={\frac{\text{grossmargin}}{1-{\text{grossmargin}}}}} Examples: Grossmargin=50%=0.5 markup = 0.5 1 − 0.5 = 1 = 100 % {\displaystyle{\text{markup}}={\frac{0.5}{1-0.5}}=1=100\%} Grossmargin=40%=0.4 markup = 0.4 1 − 0.4 = 0.667 = 66.7 % {\displaystyle{\text{markup}}={\frac{0.4}{1-0.4}}=0.667=66.7\%} Usinggrossmargintocalculatesellingprice Giventhecostofanitem,onecancomputethesellingpricerequiredtoachieveaspecificgrossmargin.Forexample,ifyourproductcosts$100andtherequiredgrossmarginis40%,then Sellingprice = $ 100 1 − 40 % = $ 100 0.6 = $ 166.67 {\displaystyle{\text{Sellingprice}}={\frac{\$100}{1-40\%}}={\frac{\$100}{0.6}}=\$166.67} Grossmargintoolstomeasureretailperformance[edit] SomeofthetoolsthatareusefulinretailanalysisareGMROII,GMROSandGMROL. GMROII:GrossMarginReturnOnInventoryInvestment GMROS:GrossMarginReturnOnSpace GMROL:GrossMarginReturnOnLabor Differencesbetweenindustries[edit] Insomeindustries,likeclothingforexample,profitmarginsareexpectedtobenearthe40%mark,asthegoodsneedtobeboughtfromsuppliersatacertainratebeforetheyareresold.Inotherindustriessuchassoftwareproductdevelopmentthegrossprofitmargincanbehigherthan80%inmanycases.[3] Intheagricultureindustry,particularlytheEuropeanUnion,StandardGrossMarginisusedtoassessfarmprofitability. References[edit] AsofFebruary5,2012,thisarticleisderivedinwholeorinpartfromMarketingMetrics:TheDefinitiveGuidetoMeasuringMarketingPerformancebyFarris,Bendle,PfeiferandReibstein.ThecopyrightholderhaslicensedthecontentinamannerthatpermitsreuseunderCCBY-SA3.0andGFDL.Allrelevanttermsmustbefollowed. ^abcdefFarris,PaulW.;NeilT.Bendle;PhillipE.Pfeifer;DavidJ.Reibstein(2010).MarketingMetrics:TheDefinitiveGuidetoMeasuringMarketingPerformance.UpperSaddleRiver,NewJersey:PearsonEducation,Inc.ISBN 0-13-705829-2.TheMarketingAccountabilityStandardsBoard(MASB)endorsesthedefinitions,purposes,andconstructsofclassesofmeasuresthatappearinMarketingMetricsaspartofitsongoingCommonLanguageinMarketingProject. ^Definitionof'GrossMargin'.investopedia.com ^http://smallbusiness.chron.com/net-profit-percentage-goals-business-23447.html-"Softwarecompanieshada90percentgrossprofitmargin,asof2011,accordingtoFinanceScholar." 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