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The difference between margin and markup using an example. Using Margin in Marketing Analysis

What is margin and where does it apply? We will try to answer this question as clearly as possible. Many people have heard about this concept, but sometimes they misunderstand the meaning. Beginning entrepreneurs especially ask the question of what margin is, mistakenly believing that it is a trading margin. This is, of course, close by definition, but incorrect. Let's try to figure it out.

The first thing I would like to point out is that this term has different meanings. For example, banking workers will give a slightly different answer to the question of what margin is than stock brokers. But first things first.

Concept in economic theory

Economic theory interprets this concept as the difference between the price of a product and its cost. How to calculate margin? It is determined by a completely understandable formula.

Product price (P) minus cost (C) divided by product price (P) multiplied by 100 percent. The mathematical formula will look like this:

M = (P-C)/P*100% .

Indicators can be in any currency.

For example, the cost of 1 kg of apples is 50 rubles, and the store sells it for 75 rubles. Therefore, the margin will be calculated as follows:

(75-50)/75*100%= 33,3%.

Economist analysts and auditors who analyze the economic activities of an enterprise are especially interested in such a concept as gross margin. It represents the difference between the revenue from the sale of the product and the additional costs of the company. This includes variable costs, which directly depend on the volume of production. For example, the services of loaders for unloading and unloading goods, temporary placement of products in a rented warehouse, etc. Thus, based on economic theory, to the question of what margin is, in simple words You can answer this way: this is a percentage of the organization’s net profit.

I would like to note that this concept in our country is slightly different from the European definition. In the West, this is the percentage rate of the ratio of profit to sales of goods at the selling price. That is, a deeper understanding for analysis. Its goal is to assess the effectiveness of the company’s trade and economic activities. IN Russian Federation everything is much more banal. The question of what margin is in trading can be answered in one sentence. This is the company's profit from the transaction. That is, the difference between the sales price and all expenses of the enterprise, expressed as a percentage.

What is margin in banking?

The concept in the banking sector is closely related to credit obligations. It is understood that this is the difference between the amount issued to the borrower and the amount that must be repaid under the agreement. This is the so-called credit margin. But there is another concept that is directly proportional to bank profit - bank margin. This is the difference between interest rates on loans and deposits. There is a concept called "net interest margin". This is the difference between the interest income of a bank or any other credit institution and the rate on obligations.

For example, the bank was given deposit funds in the amount of 1 million rubles at 15 percent per annum. He also issued loans for the same amount. But now the rate is 25 percent per annum. Total difference is 10 percent. But that's not all. 5 percent goes to cover non-payment or insurance claims. The total net interest margin is 5 percent of deposited funds.

In the banking sector, there is still a guarantee margin. It is associated with a product such as a secured loan. This is the difference between the value of the collateral property or cash and the size of the loan issued.

Example in the banking sector

Let's give an example of how to calculate the margin in this case. The bank issued an amount of 1 million rubles secured by real estate. The market value of the collateral is 1.5 million. The borrower is obliged to repay an amount of 1.7 million over the entire lending period. Thus, upon return, the guarantee margin will be 0.7 million rubles. If you refuse to pay your obligations, the bank will take the property. In this case, its amount will be 0.5 million. We hope that we have explained what margin is in simple words.

Use in exchange activities

This concept in stock trading is associated with such a speculative instrument as futures. These are debt obligations of their seller towards the buyer. Suppose a company is engaged in growing wheat. In spring she needs additional funds related to field work. Without them, an agricultural company simply will not be able to grow crops. Bank lending will be too unprofitable an economic instrument. An alternative option is to sell futures or debt obligations on the exchange for the supply of future crops. This is also beneficial for the seller. The price of the crop is usually higher than at the time of sale of the obligations.

Futures are constantly resold on exchanges. In addition, there are certain situations in the markets that cause the price to fluctuate. But what is margin in this market? This is, first of all, profit from such fluctuations. Let's give an example.

A broker (trader on the exchange market) purchased futures at a price of 160 thousand points for the RTS index, after a couple of minutes the price increased to 161 thousand points and the contract was sold. Hence the margin, which is called variation, is 1 thousand points.

Difference from markup

This concept on the stock exchange is quite specific. The more common concept is “trading margin”. But ordinary people and laymen are often mistaken about it. The most common misconception is that it is equated with a trade margin.

The difference is easy to determine. Margin is the ratio of profit to the market price of a particular product. In contrast to the trade margin, which is defined as the ratio of the profit of a product to its cost.

At first glance, the two definitions are very similar. But an example with numbers will put everything in place, and it will be clear what margin is in trading.

A certain product was bought for 1000 rubles. Sold for 1500. In this example, the markup will be calculated using the formula:

(1500-1000)/1000 = 0.5. Or 50 percent.

Trading margin in in this case will be calculated using the following formula:

(1500-1000)/1500 = 0.3. Or 30 percent.

Conclusion

Let's summarize. Margin in Russia means profit in percentage terms. It is worth noting that it should not be confused with the trade margin, the formula of which is slightly different and is given above.

In general, the term “margin”, which recently came to e-commerce, is used in stock exchange, trading, and banking practice. It denotes the difference between the selling price and the cost per unit of production. This is often referred to as the profit received per unit of production or the profitability ratio as a percentage of the selling price. Essentially, this is return on sales. And the profitability ratio is the main indicator that determines the profitability of the entire enterprise as a whole.

Basic calculation formulas

M = OC – SP, where:

M – margin (called profit per unit of production)

OTs – the value of the selling price,

SP is an indicator of the cost of production.

K = P / OTs, where:

K – the value of the profitability ratio in %,

P – profit per unit. products

Commercial meaning and significance of the concept of margin

The higher the ratio, the more profitable the company is. The success of a company is determined by its high margins. Any decision made by top managers in the field marketing strategies, should be based on marginality analysis. A key factor in forecasting the profitability of potential clients, the profitability of marketing itself, and the formation of a pricing policy is also the margin.

About Product Units

Each company has its own unit value when calculating commercial margin. It can be expressed in tons, pieces, liters, etc. For example, the tobacco industry operates both in pieces of cigarettes and in blocks, packs, and boxes. In banking, margin is calculated based on the number of accounts, clients, transactions, loans, etc. For example, the margin in a bank may be the difference between rates on deposits and loans. In the stock market, the difference between the price of securities on the day of conclusion and the day of execution of the transaction. In marketing, this is a markup set by businesses. Instantly switching from one conceptual calculation model to another is a necessary condition professional activity managers.

The so-called existing in Russia gross profit is nothing more than marginal profit. Although it can still be called that with some stretch. Essentially, this is the difference between the profit from the sale of manufactured products (excluding VAT and excise taxes) and production costs. Another common name for contribution margin (MP), coverage amount, more clearly defines it as the portion of revenue that goes toward generating profit and covering costs. The meaning of the indicator is that the higher the MP, the faster the cost recovery will occur and, accordingly, the higher the profit received by the enterprise.

Calculation

How to calculate the margin in this case? Without further ado, marginal profit is calculated per unit of manufactured and sold products. From this calculation it immediately becomes clear whether we should expect an increase in profit due to the release of each individual unit of goods. The calculated marginal profit indicator does not characterize the efficiency of the enterprise as a whole, but helps to identify the most profitable (and most unprofitable) types of products in terms of possible profitability. MP depends on such volatile market indicators as variable costs and price. To achieve an increase in marginal profit (income), you have to increase the markup on products and/or sell more. Marginal profit is the difference between sales income and variable costs.

Sometimes another name is used - contribution to the coverage. MP is a contribution to generating profit and covering costs (fixed). If an enterprise produces or sells several types of products, calculating marginal profit is simply necessary. It will allow you to calculate the share of contribution of each type to the total income of the enterprise. Based on the calculation results obtained, a group of more profitable products is selected and less profitable ones are eliminated.

The next indicator - the rate of marginal income - determines the share of marginal income in revenue after sales or the share average size MP in the price of products.

European accounting system

The European accounting system defines the concept of margin completely differently. If in Russia “margin” is rather synonymous with profit, then in Europe gross margin is an indicator of the total income from sales after direct costs incurred for the production of goods and services. It is expressed as a percentage.

Margin 100 – 200% - is this possible?

Sometimes in the press and in behind-the-scenes conversations one hears such victorious statements. But can this be true? Based on the very definition of margin - an indicator of profitability of sales - definitely not. Margins can approach 100% due to cost reduction. But just as there cannot be zero cost, there cannot be a margin (profitability) of 100%.

Margin (English margin - difference, advantage) is one of the types of profit, an absolute indicator of the functioning of an enterprise, reflecting the result of primary and additional activities.

Unlike relative indicators (for example, ), margin is necessary only for analyzing the internal situation in the organization, this indicator does not allow comparing several companies with each other. IN general view margin reflects the difference between two economic or financial measures.

What is margin

Margin in trading– this is a trade margin, a percentage added to the price to obtain the final result.

What mark-up and margin are in trading, as well as how they differ and what you should pay attention to when talking about them, is clearly explained in the video:

IN microeconomics margin(grossprofit - GP) - a type of profit that reflects difference between revenue and costs for manufactured products, work performed and services provided, or the difference between the price and the cost of a unit of goods. This type profit coincides with the indicator " profit from sales».

Also within economics of the company allocate marginal income(contribution margin - CM) is another type of profit that shows the difference between revenue and variable costs. This type of profit helps to draw conclusions about the share of variable costs in revenue.

IN financial sector under the term " margin» refers to the difference in interest rates, exchange rates and securities and interest rates. Almost all financial transactions are aimed at obtaining margin - additional profit from these differences.

For commercial banks margin– this is the difference between the interest on loans issued and deposits used. Margin and marginal income can be measured both in value terms and as a percentage (the ratio of variable costs to revenue).

On securities market under margin refers to collateral that can be left to obtain a loan, goods and other valuables. They are necessary for transactions on the securities market.

A margin loan differs from a traditional loan in that the collateral is only a portion of the loan amount or the proposed transaction amount. Typically the margin is up to 25% of the loan amount.

Margin also refers to the advance of cash provided when purchasing futures.

Gross and percentage margin

Another name for marginal income is the concept of “ gross margin"(grossprofit – GP). This indicator reflects the difference between revenue and total or variable costs. The indicator is necessary for analyzing profit taking into account cost.

Interest margin shows the ratio of total and variable costs to revenue (income). This type of profit reflects the share of costs in relation to revenue.

Revenue(TR– total revenue) – income, the product of the unit price and the volume of production and sales. Total costs(TC– total cost) – cost price, consisting of all costing items (materials, electricity, wages, etc.).

Cost price are divided into two types of costs - fixed and variable.

TO fixed costs(FC – fixed cost) include those that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.

TO variable costs(VC – variable cost) include those that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, supplies, etc.

Margin - calculation formula

Gross Margin

GP=TR-TC or CM=TR-VC

where GP is gross margin, CM is gross marginal income.

Interest margin calculated using the following formula:

GP=TC/TR orCM=VC/TR,

where GP is interest margin, CM is interest margin income.

where TR is revenue, P is the price of a unit of production in monetary terms, Q is the number of products sold in physical terms.

TC=FC+VC, VC=TC-FC

where TC– full cost, FC – fixed costs, VC – variable costs.

Gross margin is calculated as the difference between income and costs, percentage margin is calculated as the ratio of costs to income.

After calculating the margin value, you can find contribution margin ratio, equal to the ratio of margin to revenue:

To md =GP/TR or To md =CM/TR,

where K md is the marginal income coefficient.

This indicator K md reflects the share of margin in the total revenue of the organization; it is also called rate of marginal income.

For industrial enterprises the margin rate is 20%, for retail enterprises – 30%. In general, the marginal income coefficient is equal to profitability of sales(by margin).

Video - profitability of sales, the difference between margin and markup:

What's the difference between margin and profit?

In any business there are concepts of margin and profit. Some equate them to each other, others argue that they cannot be compared. Both indicators are of strategic importance for the economic success of an enterprise or bank.

Thanks to them, the financial result of the work, the efficiency of using available resources and overall result. The definitions of profit and margin can often be encountered when discussing Forex issues, in banking business and other activities related to finance and economics. To understand which indicator shows what, let’s analyze each of them.

What is margin?

This term came from Europe. Translated from English Margin or French Marge, margin means markup. Margin is found in banking and insurance business, commercial transactions and operations with securities and so on. Economists call margin the difference between a company's income and the cost of production. Often the words “margin” are replaced with “gross profit”. The principle of calculating the margin is simple: the cost is subtracted from the amount received. The resulting value indicates how much real money the organization receives from the sale of products without taking into account additional costs.

The importance of margin should not be underestimated. It shows how effective a particular business is. Margin is directly related to the company's income and evaluates its activities.

Bank employees talk about margin when they compare the difference in interest rates on loans and deposits. Relatively speaking, if a bank wants to attract customers with high rates on deposits, then it is forced to offer high rates on loans.

Margin plays big role in assessing the company's performance. Net profit will directly depend on its size. Margin is the basis for the formation of development funds. The margin percentage (or markup percentage) will be calculated by the ratio of cost to revenue. If you calculate the gross “dirty” profit to revenue, you will get an important indicator - the margin ratio. The percentage will give you the return on sales, and this is the main indicator of the performance of any organization.

If we take the concept of margin on an exchange, for example, Forex, then it means temporary collateral cooperation. During it, the participant receives the necessary amount to carry out the operation. The principle of margin transactions is that the participant does not have to pay the entire value of the contract. He uses the resources provided to him and a small part of his own money. As soon as the transaction is closed, the income received will go to the deposit on which they were placed. If the transaction becomes unprofitable, the loss will be covered by borrowed funds, which will still have to be returned later.

Nowadays, the “front-margin” and “back-margin” indicators, which are related to each other, have become fashionable. The first indicator reflects the receipt of income from mark-ups, and the second - from shares and bonuses.

Thus, these indicators are calculated during the operation of any company. They formed a separate direction management accounting– marginal analysis. Thanks to margin, the company manipulates variable costs and expenses, thereby influencing the final financial result.

What is profit?

The final goal of any business is to make a profit. This is a positive financial result of the work. A negative one will be called a loss. You can see the difference between margin and profit in the income statement (form No. 2). To make a profit, you need to clear the margin from all expenses. The calculation formula will look like this:

Profit = Revenue - Cost - Selling costs - Management costs - Interest paid + Interest received - Non-operating expenses + Non-operating income - Other expenses + Other income.

The resulting amount is subject to taxation, after which net profit is formed. Then it goes to pay dividends, is put aside in reserve and invested in the development of the company.

If, when calculating the margin, only production costs (costs) are taken into account, then all types of income and expenses are involved in calculating profit.

In the process of business, several types of profit are calculated, but what is important for management is net profit, which shows the difference between revenue and all costs. If revenue has a larger nominal value and is expressed in monetary terms, then all other costs include production costs, tax deductions, excise taxes, etc.

Gross profit reflects the difference between the amount received and production costs excluding taxes and other deductions. In its calculation, it is similar to marginal profit. Unlike gross “dirty” income, marginal takes into account variable expenses, for example, fuel, electricity, wages, cost of materials for production, etc. Those companies that calculate marginal profit look not only at its amount, but also at the speed of circulation of money.

What is the difference between profit and margin?

Unlike profit, margin takes into account only production costs, which only add up to the cost of production. Profit takes into account all the costs that arise in the course of doing business. Analysis of the results shows that as the margin increases, the company's profit also increases. The higher the margin, the higher the profit will be. In terms of size, profit is always less than margin.

If profit shows the net result of a business, then margin refers to the fundamental pricing factors on which the profitability of marketing costs, customer flow analysis, and revenue forecast depends. There is an important rule in management accounting that all changes that occur in revenue are proportional to the gross margin. Margin, in turn, is proportional to the increase or decrease in profits. Economists call the ratio of gross margin to profit the operating leverage effect. It is used to evaluate the efficiency of using available resources and the overall result.

Thus, all indicators of the financial world have their own meaning. Their calculation will be influenced by the methods of analysis and accounting rules used. Correct interpretation of the dynamics of all indicators is necessary for competent planning of business activities. Both margin and profit say a lot about the performance of an organization.
It is recommended that calculations of these indicators be carried out regularly at specified periods in order to compare values and identify patterns. Seeing this or that dynamics, the manager can trace market trends and make the necessary rearrangements and adjustments in the organization’s activities, pricing policy and other aspects affecting the success of the company. The outcome of all work depends on how timely and correctly the margin and profit indicators are calculated and assessed.

Briefly: To assess economic activity, we use different indicators. The key is margin. In monetary terms, it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.

Evaluate periodically financial activities enterprises are necessary. This measure will help identify problems and see opportunities, find weak points and strengthen its strong position.

Margin is an economic indicator. It is used to estimate the amount of markup on the cost of production.

How to calculate margin and markup in Excel

It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.

It is often used to assess the profitability of an industry (oil refining):

Or justify making an important decision at a separate enterprise (“Auchan”):

It is calculated as part of an analysis of the company's financial condition.

Examples and formulas

The indicator can be expressed in monetary and percentage terms. You can count it this way or that way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:

M = CPU - C, where

CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:

M = (CPU - C) / CPU x 100

Peculiarities:

cannot be 100% or more;
helps analyze processes in dynamics.

Rice. 1. Dynamic chart

An increase in product prices should lead to an increase in margins. If this does not happen, then the cost is rising faster. And in order not to be at a loss, it is necessary to reconsider the pricing policy.

Attitude towards markup

Margin ≠ Markup if we're talking about about percentage terms. The formula is the same with the only difference - the divisor is the cost of production:

H = (CP - C) / C x 100

Download the margin calculation algorithm in excele

How to find by markup

If the markup of a product is known in percentage and another indicator, for example, the selling price, calculating the margin is not difficult.

Initial data:

markup 60%;
sale price - 2,000 rub.

We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.

Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%

Resume

The indicator is useful for small enterprises and large corporations. It helps to assess the financial condition, allows you to identify problems in the pricing policy of the enterprise and take timely measures so as not to miss out on profits. Calculated equally with net and gross profit, for individual goods, product groups and the entire company as a whole.

Peter Stolypin, 2015-09-22

Questions and answers on the topic

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Economic concepts

What is margin

Margin is one of the determining factors in pricing. Meanwhile, not every aspiring entrepreneur can explain the meaning of this word. Let's try to rectify the situation.

The concept of “margin” is used by specialists from all spheres of the economy. This is usually relative value, which is an indicator of profitability.

How margin is calculated: differences between markup and margin

In trade, insurance, and banking, margin has its own specifics.

How to calculate margin

Economists understand margin as the difference between the cost of a product and its selling price. It serves as a reflection of business performance, that is, an indicator of how successfully a company converts revenues into profits.

Margin is a relative value expressed as a percentage. The margin calculation formula is as follows:

Profit/Revenue*100 = Margin

Let's give simplest example. It is known that the enterprise margin is 25%. From this we can conclude that every ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks relate to expenses.

What is gross margin

When assessing the profitability of a company, analysts pay attention to gross margin - one of the main indicators of a company's performance. Gross margin is determined by subtracting the cost of manufacturing a product from the revenue from its sale.

Knowing only the size of the gross margin, one cannot draw conclusions about the financial condition of the enterprise or evaluate a specific aspect of its activities. But using this indicator you can calculate other, no less important ones. In addition, gross margin, being an analytical indicator, gives an idea of the company's efficiency. The formation of gross margin occurs through the production of goods or provision of services by the company's employees. It is based on work.

It is important to note that the formula for calculating gross margin takes into account income that does not result from the sale of goods or the provision of services. Non-operating income is the result of:

writing off debts (receivables/creditors);
measures to organize housing and communal services;
provision of non-industrial services.

Once you know the gross margin, you can also know the net profit.

Gross margin also serves as the basis for the formation of development funds.

When talking about financial results, economists pay tribute to the profit margin, which is an indicator of the profitability of sales.

Profit Margin is the percentage of profit in the total capital or revenue of the enterprise.

Margin in banking

Analysis of the activities of banks and the sources of their profits involves the calculation of four margin options. Let's look at each of them:

1. Banking margin, that is, the difference between loan and deposit rates.
2. Credit margin, or the difference between the amount fixed in the contract and the amount actually issued to the client.
3. Guarantee margin– the difference between the value of the collateral and the amount of the loan issued.
4. Net interest margin (NIM)– one of the main indicators of the success of a banking institution. To calculate it, use the following formula:
NIM = (Fees and Fees) / Assets
When calculating the net interest margin, all assets without exception can be taken into account or only those that are currently in use (generating income).

Margin and trading margin: what is the difference

Oddly enough, not everyone sees the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let’s remember the formula for calculating margin:

Profit/Revenue*100 = Margin

(Sales price – Cost)/Revenue*100 = Margin

As for the formula for calculating the markup, it looks like this:

(Selling price – Cost)/Cost*100 = Trade margin

For clarity, let's give a simple example. The product is purchased by the company for 200 rubles and sold for 250.

So, here is what the margin will be in this case: (250 – 200)/250*100 = 20%.

But what will be the trade margin: (250 – 200)/200*100 = 25%.

Conclusion

The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what is received and what is given. However, margin is not the only parameter used to determine efficiency. By calculating the margin, you can find out other important indicators economic activity enterprises.

Markup or margin? What's the difference?

As you know, any trading company lives off the markup, which is necessary to cover costs and make a profit:

Cost + markup = selling price

What is margin, why is it needed and how does it differ from markup, if it is known that margin is the difference between the selling price and cost?

It turns out that this is the same amount:

Markup = margin

What's the difference?

The difference lies in the calculation of these indicators in percentage terms (the markup refers to the cost, the margin refers to the price).

Markup = (Sale Price - Cost) / Cost * 100

Margin = (Sale Price - Cost) / Sale Price * 100

It turns out that in digital terms the amount of markup and margin are equal, but in percentage terms the markup is always greater than the margin.

For example:

The margin cannot be equal to 100% (unlike the markup), because

Management accounting

in this case, the Cost should be equal to zero ((10-0)/10*100=100%), which, as you know, does not happen!

Like all relative (expressed as a percentage) indicators, markup and margin help to see processes in dynamics. With their help, you can track how the situation changes from period to period.

Looking at the table, we clearly see that the markup and margin are directly proportional: the higher the markup, the greater the margin, and therefore the profit.

The interdependence of these indicators makes it possible to calculate one indicator given the second.

Thus, if a company wants to reach a certain level of profit (margin), it needs to calculate the markup on the product, which will allow it to obtain this profit.

As an example, let's calculate:

— margin, knowing the sales amount and markup;

— markup, knowing the sales amount and margin

Sales amount = 1000 rub.

Markup = 60%

(1000 - x) / x = 60%

Hence x = 1000 / (1 + 60%) = 625

It remains to find the margin:

1000 — 625 = 375

375 / 1000 * 100 = 37,5%

Thus, the formula for calculating margin through markup and sales volume will look like:

Margin = (Sales Volume - Sales Volume / (1 + Markup)) / Sales Volume * 100