# Sales Margin Definition

## Sales Margin Definition

Sales margin is essential to a business because the higher the sales margin, the more profit the business makes. The way companies calculate their sales profit can vary. You can use standard calculations to determine the amount of profit from a service or product, which is vital for long-term growth and survival.

## Calculating Sales Margin

To calculate sales profit, subtract costs associated with the sale from the net income. By analyzing the profit from sales, you can determine which products are the most profitable.

Income – Sales discounts and surcharges – Cost of goods or services sold – Seller commission = Sales margin

To calculate the sales margin as a percentage, divide the sales margin obtained in the previous calculation by the net sales figure.

To calculate sales profit:

1. Select a period. You can calculate monthly, quarterly, semi-annually, or yearly.
2. Keep these periods consistent for comparative purposes.
3. Subtract the sales cost from the total revenue, and the result is the dollar value of your sales margin.
4. Divide the sales margin by the total gross sales.

The result is a percentage indicating the sales margin.

For example, last month’s total sales were \$50,000, and sales cost was \$35,000. The sales margin was \$15,000. Divide \$15,000 by \$50,000 (total sales) means monthly sales profit was 30 percent.

## Sales Value

Include all expenses related to your costs of selling goods and services, including the cost of raw materials used to make the finished product. Include additional direct costs such as reimbursement, travel, entertainment, and fees paid to sales personnel or independent contractors. Add your opening stock and subtract your closing stock, whether a finished product or goods.

## Sales Margin Variations

The sales margin for the total sales package is the most significant, as the seller might be unable to complete the sale if they had not included all the components in the box. The sales margin is calculated for an individual sale or a sales group. For example, a company may sell software, training, and installation support to a customer as a service package.

## Differences Between Sales Margin and Gross Profit Margin

Sales profit margin evaluates one or more transactions for a product over a given period. Gross profit margin measures the profit from operating activities less the cost of goods sold. The price of goods sold includes operating expenses and wages for products and services of the entire business, not the cost of a single product.

The main difference between sales and gross profit margins lies in the number of products and costs they value. The sales margin evaluates a portion of the products sold, while the gross profit evaluates the entire income from the products sold and includes all costs of the goods sold.

Another calculation option is the calculation of sales margin by sellers. This can be useful for determining the seller’s performance level or calculating various commissions or bonuses.

The sales margin calculation is just an average margin; it does not include miscellaneous overheads and, therefore, may generate returns that do not reflect the overall profitability of the business. The net profit margin should be calculated for a complete picture of profitability.

## Sales values

Include all expenses related to your costs of selling goods or services, including the cost of raw materials used to make the finished product. Include additional direct costs such as reimbursement, travel, entertainment, and fees paid to sales personnel or independent contractors. Add your opening stock and subtract your closing stock, whether a finished product or goods.

You should compare sales margins for different periods for your company. Avoid comparing companies of various sizes. If you own a small electronics store in your neighborhood, don’t compare sales revenue to big stores. You will get little data related to the size. Compare your data with companies similar in industry and size to yours to see how your gross margin compares to similar companies.

## High Profitable Industries Examples

Luxury goods and high-end accessories businesses often operate with high-profit potential and low sales. Some high-value items, such as a high-end car, are ordered for manufacture. The device is made after receiving an order from a customer, making it a low-cost process without large operational overheads.

Software or game development companies can invest in developing a particular software/game first and then make big money by selling millions of copies at a minimal cost. Making strategic agreements with device manufacturers, such as offering Windows and MS Office pre-installed on Dell laptops, further reduces costs while maintaining revenue.

Patent-protected businesses such as pharmaceuticals may initially incur high research costs, but they reap big rewards with high profits by selling patent-protected drugs without competition.