What Are Margins & How Are They Used In Wholesale B2B Trade?
What are margins?
Key Performance Indicators (KPIs) are specific metrics that allow wholesale B2B (Business-to-Business) companies to measure, track & evaluate performance in relation to profitability, efficiency & financial health.
Margins are KPIs and are a fundamental measurement used in wholesale trade to sustain & maximise business profits, aiming to optimise operations. Margins relate to how much a product costs to produce or acquire compared to the price that same product is sold on to customers. In simple terms, it is the difference between the cost price & the selling price.
Here are some different types of margins:
- Gross Margin: ((revenue - COGS) / revenue) x 100
Revenue refers to the income of a business, whilst COGS refers to the Cost Of Goods Sold (this could involve materials, manufacturing, labour, storage, transportation etc.). This type of margin is a great indicator of the efficiency of a businesses financial performance.
- Net margin: (net profit / revenue) x 100
Net profit refers to the amount of money left over when you minus the cost from the revenue, often referred to as the ‘bottom line’. A higher net profit margin indicates a better profitability- meaning a greater efficiency of converting sales to profit.
- Contribution margin: ((selling price - variable costs) / selling price) x 100
Variable costs refers to the total sum of costs when products are produced- these can go up or down due to factors such as inflation & consumer demand. Contribution margin is great for helping a business to know if their products' prices cover the cost of producing it.
- Markup Margin: ((selling price - COGS) / selling price) x 100
Selling price refers to the price the product is sold to customers. Businesses should pay attention to this margin to make sure that they are generating a profit, giving competitive prices & covering costs efficiently.
- Operating Margin: (operating income / revenue) X 100
This is beneficial for measuring the profit of a business's operations, showing the % of revenue remaining as operating income after taking away the operating expenses (e.g. COGS, rent, utilities, pay etc). Knowing your operating margin is extremely important, as a high margin indicates the company can generate more profit, which is enticing to investors.
A profit margin measures a businesses performance and measures up expenses and earnings. Manufacturers & wholesalers often look to gain a 15-20% profit margin on their products. Usually, retailers aim to make a profit between 20-50%.
*Check out our easy-to-use Product Margin Calculator on our website now to get a better understanding of your business!*
Using Margins in Wholesale B2B Trade
Although their role in the business & finance world is important, they are extremely important in B2B trade. Calculating profitability shows a businesses ability to maximise its revenue whilst minimising the costs. The following reasons further highlight the importance of calculating and analysing margins in wholesale B2B trade.
- Pricing Strategy: simply put, it allows a business to find the best selling price for their product/service. If higher margins are found, this allows more room to increase the prices. Whereas if they are lower, businesses are more likely to offer competitive prices.
- Financial Analysis: this involves analysing & comparing the margins to show room for improvement in relation to performance, profitability, budgeting, revealing trends and other areas. Plus, having this knowledge is great for risk management, as high profit margins allow companies to be able to cope with financial setbacks.
- Decision Making: margins allow businesses to gain evidence relating to how well costs are being delegated, influencing decisions such as acquiring more stock, investing in new markets, cancelling lines & much more.
- Negotiation Power: through margin calculations you can gain easily explainable figures- margin points- that can be used by both wholesalers & retailers to arrive at mutually beneficial prices.
- Investor & Buyer Confidence: being able to show your businesses ability to generate high profits and in turn a higher valuation gives greater confidence to both investors & buyers.
- Discounts: If a product has a high profit margin, it would be feasible to offer discounts, promotions etc whilst still maintaining a profit.
Overall, knowing margins is a crucial part to running a successful & well run business. The figures you acquire from these calculations help to complete vital assessments such as decision making, pricing strategy, negotiation power and much more. If you really want to maximise your businesses ability to gain profits, the first step should be calculating your margins which you can easily do here.
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