Many of my retailer clients hear that they should be going for a target margin of 65% or perhaps that the mark-up needs to be a minimum of 2.2. With the exception of those who have worked in a commercial team for a major multiple everyone else gets really confused about this… This blog is a revised / refreshed version of an earlier post with a bit more detail added to help clarify a few questions that came my way recently!
Firstly I’m going to clear up some of the confusion over terminology….
Retail Jargon – What is the difference between retail sales margin, cash margin, mark-up, net contribution etc?
Lets start at the beginning:
- Retail Sales: This is the amount of cash you’ve taken, net of returns, but inclusive of VAT.
- Net sales: This is the retail sales value (from above) minus VAT (where VAT is payable on the item in the first instance – one to watch if you sell certain items with zero vat such as children’s clothing or reduced rate VAT items such as mobility aids – check the details with HMRC)
- Cost of sales / product cost: This is the total cost of the goods, minus VAT, that were sold to achieve the retail sales value. Ideally the cost price you use for this calculation is the “landed” cost – meaning the cost of goods including delivery to your location. If the cost price that you buy products from suppliers at does not including delivery then you need to apportion the delivery charges across all the products on the delivery to give you a more accurate cost price per item. Obviously you can’t receive the goods without incurring a delivery charge, thus it is a direct cost of sale.
- Cash margin: This is the difference between the net sales value and the cost of sales value. This can also be called net contribution. This cash margin / net contribution is essentially the true income to the retail business from which all fixed and variable operating costs need to be paid for before you can calculate your profits. Cash margin = (net sales – cost of sales). There are 2 ways in which the cash margin can be expressed as a percentage margin – and it is critical you know which you are dealing with
- % margin “GMROI”: This means gross margin return on investment. This is the cash margin expressed as a percentage return on the original investment in the stock. I find this formula useful: % margin GMROI = (net sales – cost of sales)/cost of sales. This formula is more commonly used by finance departments to describe the productivity of stock purchased.
- % margin of sales: Gross margin achieved on sales. This is the cash margin expressed as a percentage of the net sales. This is the formula most commonly used by buyers. Essentially it states how much, as a percentage of the net sales value, the margin income is for the business. I find this formula useful: % margin of sales = (net sales – cost of sales)/net sales. This formula is usually the one buyers consider when assessing if a product is going to be able to deliver their commercial targets or not.
This can be quite confusing; so to put this in numerical terms to make it absolutely clear:
- Net sales = £100
- Cost of sale = £50, therefore…
- Gross margin = £50
- GMROI margin = 100% because on an investment in stock of £50 the margin return is £50.
- Margin of sales = 50% because on a sale value of £100 the margin return is £50.
- Mark-up: This is another area where many smaller retailers and suppliers to retail are confused. Mark-up is also expressed by some suppliers as “co-efficient of retail” – regardless of the way in which it is expressed essentially this is the multiplication factor that could be considered a reasonable “rule of thumb” to apply to the landed cost price of a product (the price of the product delivered to you) to determine the ideal retail price, usually EX VAT. Rarely this is expressed inclusive of VAT… watch out for that!
- Mark up Example: A supplier quotes you £10 ex VAT landed cost for an item. This item is subject to VAT at retail. Your target ex VAT mark-up is 2… So, on your calculator you are tapping in:
- 10 x 2 (that gives your ex VAT retail price, equal to the landed cost x mark-up).
- Next, depending on the VAT rate, let’s assume 20% for simplicity of the numbers, you multiply by 1.2 (to allow for the uplift of the retail price due to VAT at 20% in this example)
- The resulting target retail price is £24 including VAT…. In this example the mark-up is 2, but, once in a while someone may state the mark-up as 2.4 because they’re looking at the entire value difference between cost price and RRP (recommended retail price INC VAT)
Need some help with your retail planning figures?
If you’d like to go through your figures, or want some help to set up some simple spreadsheet analytics to make sure you’re retailing at the right price to ensure your business viability then give me a shout… I am sure this is something I can help you with 🙂