Sales at Retail, Margin, Mark-up – do you get confused with the numbers?

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:

  1. Retail Sales: This is the amount of cash you’ve taken, net of returns, but inclusive of VAT.
  2. 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)
  3. 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.
  4. 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
    1. % 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.
    2. % 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:
      1. Net sales = £100
      2. Cost of sale = £50, therefore…
      3. Gross margin = £50
      4. GMROI margin = 100% because on an investment in stock of £50 the margin return is £50.
      5. Margin of sales = 50% because on a sale value of £100 the margin return is £50.
  5. 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!
    1. 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:
      1. 10 x 2 (that gives your ex VAT retail price, equal to the landed cost x mark-up).
      2. 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)
      3. 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 🙂

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About Clare Bailey

Clare Bailey, The Retail Champion (formerly Clare Rayner), is one of the most well-known and respected retail experts in the UK. With unrivalled knowledge in retail, high streets and consumer matters, she offers unbiased, independent content – whether engaged as a professional speaker, for broadcast media, or for a written feature. Clare is a business woman, entrepreneur and founder of several small businesses. Having been born into a family of successful business owners, it was inevitable that she’d eventually jump off the corporate treadmill and step out on her own! Today her brand portfolio includes The Retail Champion, The Retail Conference, the Future High Street Summit and the Support for Independent Retail campaign. In addition, she is co-founder of Mobaro Retail UK and a non-exec director of Beed Virtual Assistant Services. Having started her career as a fast-track store management trainee for McDonalds, she went on to work with leading retailers such as M&S, Dixons and Argos. She moved swiftly into management roles before being headhunted into senior consulting roles with global software giant SAP, and international management consulting brand, Accenture. Her corporate background in senior retail, consulting and technology roles, coupled with her experience of creating and running her own business, has enabled her to be equally capable whether consulting to global brands or micro businesses. This unique blend has not only positioned her as a leading expert in all things retail, but has enabled her to add meaningful commentary and insight to the debate around the future of the high street, and, how technology is driving fundamental change in the way consumers, and businesses, interact. Clare has become an influential voice in her field, which has resulted in her becoming a regular media contributor and sought-after conference speaker. Often seen on Good Morning Britain, BBC Breakfast, Sky News, and Chanel 5 (to name a few), Clare speaks on a myriad of retail, high street and consumer issues – but is particular adept when it comes to explaining the context behind retail trading results, newly released data, and government stats, in a palatable and informative manner. In addition to broadcast and conference speaking, Clare is the proud author of two best-selling business books published by Kogan Page - The Retail Champion: 10 Steps to Retail Success, published July 2012 and How to Sell to Retail: The Secrets of Getting Your Product to Market, published February 2013. She has provided contributions to various academic texts, including Retail Marketing Management (published by Pearson). With an engaging, conversational yet informative style, Clare writes for press and content agencies, providing features, articles, blogs and opinion pieces as well as contributions to white papers and reports. However, when the situation demands a more serious style, Clare can deliver - In 2016 she wrote an extensive report for a major insurance and risk law firm, as a retail expert witness, to support a public liability suit. She found that project particularly enjoyable as it played well to her strengths – assimilating large amounts of data and information, identifying the key points and articulating that in an understandable manner. When not on TV or speaking at conferences, Clare’s “day job” sees her supporting consumer-facing businesses through her consultancy services. When asked to describe what she most loves about retail consulting it is typically the opportunity to “dig deep”, getting “under the bonnet”, in order to leverage the business data to uncover the insights that lead to “lightbulb moments”. She also loves working on business change programmes that centre on improving the processes and systems to increase profitability by supporting more rapid, better informed decision making, improving the customer experience, or simply by become more efficient and streamlined. In this respect she considers herself a “business engineer” with a brain that works like a relational database! Due to her years of experience, her logical, objective approach, her quick, rational thinking, she is known for being able to cut through complexity, seeing right through to the crux of issues, finding creative solutions that others may have overlooked. As if all that wasn’t enough, Clare is a working mum, juggling a home life in rural Lincolnshire with her partner, their 5 kids, 4 cats, and geriatric Labrador! For all enquiries, contact Clare directly on 01727 238890 or email champion@retailchampion.co.uk.
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20 Responses to Sales at Retail, Margin, Mark-up – do you get confused with the numbers?

  1. Pingback: Profit Margin vs. Markup: Explained |

  2. Paul says:

    just out of interest, why is your mark-up example 1.8? The majority of clothing retailers work on 2.5 upwards, some on 3.0, so I’m interested to know what sector works on a 1.8 mark-up. Thanks.

  3. Clare Rayner says:

    Hi Paul
    First of all the example was just to illustrate the numbers. However, most of the Independent retailers I know when buying branded items simply can’t get that level of mark up. The are wild variations based on product, supplier etc. There is no single forumla but from experience this number was a realistic number.

  4. peter bonhomme says:

    Hi Clare
    if the gross purchase price (net +vat) is marked up say 50% – the selling price will include a vat element – the selling price is then subject to vat – gross selling price – we pay back to vatman the difference between input tax and output tax.
    If only the net price is marked up say 50% again then the difference between input tax and output tax is a lower figure – reducing the amount of vat paid back to vatman. is this correct?
    please comment as I think someone is paying too much vat back to hmrc
    Peterb

    • Clare Rayner says:

      HI Peter
      Retailers don’t tend to apply the mark-up to the gross, rather the net purchase price. The gross is irrelevant as that’s tax they can reclaim. Their own operating margins of course are ex-VAT because of the claim against their purchases and the payment on their sales (unless the items command different VAT rates – that’s messy and that scenario would need a strong book keeper / accountant to work through!)

      To keep to a simple explanation I’ll give a simple example.
      Let’s say the retailer buys an item for £50 +VAT = £60 all in. Applying 2 x mark up to the exVAT price and we arrive at a figure of £100 +VAT for the retail price, this means that the retail price is £120.
      The VAT owed on the original £50 would have been £10, the VAT due on the item sold is £20, therefore the effect of a sale of this item on the VAT return is £10 owed to HMRC.
      Does that help?

      • Dan Clay says:

        Do I understand correctly that following your example the retailer is in fact making £60 profit which is greater than the x2 mark up as the VAT liability is only £10? I’m trying to work out my net cost price selling to retailer who requires a 50% margin or x2 markup with my RRP at £28.78

      • Clare Rayner says:

        Sorry for late reply – not sure I completely understand your questions, can you email me on champion@retailchampion.co.uk and I can explain more fully to clear up any confusion!
        Cheers

      • John says:

        Hi Clare,
        For this example, does it not mean that the actual profit margin is £60 or 55%? So input/output adjusted, a 2x markup = 55% margin?
        Thanks

      • Clare Rayner says:

        Hi John
        I thought I’d approved this before, and replied, but it seems it didn’t work via the phone app 😦
        Can you email me on champion@retailchampion.co.uk as I don’t quite understand your question and I can clear up any confusion if we can discuss via email!
        Cheers!

  5. Michael says:

    Hi Claire,

    Are you able to help me with my figures please.

    Kind Regards,

    Michael

  6. Jane says:

    Thanks for a great blog! I came across it as I’m about to go back to work as a buyer after a few years out of the game and am just refreshing myself with basic calculations. Can you help me with something else please? All the margin calculations I find on the web are based on gross margin, but what do you do when you’ve been given the net target margin?

    So say I know the following:
    Net margin: 59%
    Sales price: £16.99
    Cost price: £4.44

    Based on this, I could calculate the gross margin to be 74% and I could work with that, but is there a way to do your margin calculations using the net margin please? That is, if you know the cost price and net margin, can you calculate the sales price? Or if you know the sales price and net margin can you calculate the cost price?

    Hope this makes sense – I’m just in a bit of a pickle about the net margin (as buyers in my industry – fashion retail – are given net margin targets)

    Thanks in advance!

    • Clare Rayner says:

      There is no quick reply to this without understanding what they are accounting for in net margin. Is the landed cost being used as cost price to achieve net? Or is some other cost being stripped out? Without the definition of net I would not be able to advise… sorry!

  7. Jane says:

    Hi Clare, thanks for getting back to me. Yes, the landed cost price is being used. To achieve net, 20% is subtracted form Gross Margin (i.e. gross margin x 0.80) so I’m assuming 20% is the given for all overhead costs. Let me know if you need anything else and thanks again!

  8. Clare Rayner says:

    Then I think it’s a simple edit to the formulae if you are using a rule of thumb on the relationship between gross and net… did you know you get a free margin calculator download (and various other templates and tools) when you buy my book – see http://www.retailchampion.co.uk/retail-success… the downloadable resources are accessed once you enter your reader code in my website. With the margin calculator you should be able to edit the formulae, or add in new, that help you derive price from target margin etc…
    Hope that helps!

  9. Jane says:

    Thanks Clare, I’ll have a look at that. Much appreciated!

  10. Lesley says:

    Hi,

    I’ve recently been asked to supply samples to a high end store which i have done. I got an email virtually instantly
    “Thanks so much.. we have just received them. Please could you let me know what the costs would be in to us. They seem to have a couple of months shelf life.. is this correct? If we were to proceed volumes would be low to being with… Probably about 5 of 5 SKUs”
    Which sounded promising so I replied that I would charge them £15.00 lrg size £11.00 small size I then got the reply
    “We have tasted them a little earlier. The flavour of the cake was absolutely fantastic, and the lovely almond flavour from the marzipan worked really well. Everyone commented on how beautiful the product is. My only hesitation is the cost for the product, I appreciate the amount of effort, time and cost of goods is expensive but our customer average spend for fruitcakes would be approximately £25 – £35, for an 6 – 8 inch cake respectively. We work on a 60% margin rate (really high especially when compared to other retailers) and as such would have the retail the small one at approximately £30 and the larger one at £40 – £45 and due to other fruit cake products being in the mix at a lower price point I would be worried about sales for these beautiful products. Unfortunately I do not think these would be products we can currently go for due to the high costs however I would love to keep in touch and if you have any other products please contact me in the future.”
    So I have tried to work out how they get to these figures and I don’t understand. I would like to negotiate but not sure where to go with my prices – can you help?

    • Clare Rayner says:

      Hi Lesley
      Here’s the logic…

      1. To get 60% margin as targeted they need to hit an RRP of £45 (which is too high for their customers they say) then this equates to £37.50 after VAT
      2. Margin is based on £37.50 minus £15 cost = £22.50. Expressed as a % of retail (so 22.50/37.50) = 60%

      So they are essentially saying that your cost price is too high as to derive a selling price that also gives them target margin from your cost price it prices the item out of the market.

      You need to be asking what their target retail price is, then, from that, figure out if you can get to a cost price per unit which enables them to make the desired 60% margin.

      Hope that helps
      Clare

  11. Segismundo Nogueras says:

    Dear Clare
    I am an export area manager specialized in wholesale business, who is now turning into retail. I just discovered your blog today, and you solved my doubt regarding how to combine VAT rate, with mark up, in order to obtain the RRP.
    I just wanted to say… thanks!! 🙂
    Regards
    Segis
    Needless to say, I have subscribed to Retail Champion 🙂

  12. Caroline Hay says:

    Very helpful – just set up a lingerie shop and many large suppliers quote wholesale price ex VAT and RRP inc VAT AND say that the difference is mark up. When I phoned them they said that they were right but am sure that they are wrong. The mark up should be ex VAT on wholesale and retail. Very misleading.

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