Today, the term “margin” is widely used in stock exchange, trading, and banking. Its main idea is to indicate the difference between the selling price and the cost per unit of product, which can be expressed either as profit per unit of production or as a percentage of the selling price (profitability ratio). What is marginality? In other words, this is the return on sales. And the coefficient presented above serves as the main indicator, because it determines the profitability of the enterprise as a whole.
What is the commercial meaning and meaning of this term? The higher the ratio, the more profitable the company. This means that the success of a particular business structure is determined by its high margins. That is why it is advisable to base all decisions in the field of marketing strategies, which, as a rule, are made by managers, on the analysis of the indicator in question.
What is marginality? It should be remembered: margin is also a key factor in predicting the profitability of potential clients, developing pricing policies and, of course, the profitability of marketing in general. It is important to note that in Russia marginal profit is often called gross profit. In any case, it represents the difference between the profit from the sale of the product (without excise taxes and VAT) and the costs of the production process. Coverage amount is the second name of the concept being studied. It is defined as the portion of revenue that goes directly to generating profit and covering costs. Thus, the main idea is to increase the profit of the enterprise in direct proportion to the rate of recovery of production costs.
To begin with, it should be noted that the calculation of marginal profit is made per unit of produced and sold product. It is he who makes it clear whether we should expect an increase in profit due to the release of the next product unit. The marginal profit indicator is not a characteristic of the economic structure as a whole, but it allows one to identify the most profitable (and most unprofitable) types of product in relation to the possible profit from them. Thus, marginal profit depends on price and variable production costs. To achieve the maximum indicator, you should either increase the markup on products or increase sales volumes. 
So, the marginality of a product can be calculated by using the following formula: MR = TR - TVC (TR is the total profit from the sale of the product; TVC is variable costs). For example, the production volume is 100 units of goods, and the price of each of them is 1000 rubles. In turn, variable costs, including raw materials, wages to employees and transportation, amount to 50,000 rubles. Then MR = 100 * 1000 – 50,000 = 50,000 rubles.
To calculate additional revenue, you need to apply another formula: MR = TR(V+1) - TR(V) (TR(V) – profit from sales of products at current production volume; TR(V+1) – profit in case increase in output by one unit of goods).
Marginal profit and break-even point
It is important to note that the margin (formula presented above) is calculated in accordance with the division of fixed and variable costs in the pricing process. Fixed costs are those that would remain the same even if there was zero output. This should include rent, some tax payments, salaries of employees in the accounting department, human resources department, managers and maintenance personnel, as well as repayment of loans and borrowings.
The situation in which the contribution to the covering is equal to the amount of fixed costs is called the break-even point.
At the break-even point, the volume of sales of goods is such that the company has the opportunity to fully recoup the costs of producing the product without making a profit. In the figure above, the break-even point corresponds to 20 units of product. Thus, the income line crosses the cost line, and the profit line crosses the origin and moves into a zone where all values are positive. In turn, the marginal profit line crosses the line of fixed production costs.
Methods for increasing marginal profit
The question of what marginality is and how to calculate it is discussed in detail. But how to increase marginal profit and is it a priori possible? Methods for raising the MR level are mostly similar to methods for increasing the overall level of income or direct profit. These include participation in tenders of various types, increasing production output to distribute fixed costs between large volumes of product, studying new market sectors, optimizing the use of raw materials, searching for the cheapest sources of raw materials, as well as an innovative advertising policy. It should be noted that, in general, the fundamentals of the marketing industry do not change. But the advertising industry is constantly undergoing some changes, but the main reason for its existence and application remains the same.
All companies that engage in trading activities live off mark-ups. That is, they add a certain amount in rubles to the cost and get the selling price of the product. Then what is margin? Is it equal to the markup? After all, it is known that margin is the difference between the selling price and the cost.
Margin: approaches
Margin is an indicator of profitability of sales or the difference between the selling price and the cost of production. This difference is expressed either as a percentage of the selling price or as profit per unit.
Margin = selling price of goods (rub.) - cost (rub.)
Margin (profitability ratio) = profit per unit of goods (rub.) / selling price of this unit (rub.)
The margin indicator must be calculated at the end of each reporting period, for example, a quarter. If the company is stable, then the margin indicator can only be calculated at the end of the year.
This indicator reflects the profitability of the product. The purpose of the calculation is to determine the amount of sales growth and manage pricing. A large value of this indicator indicates the high profitability of the enterprise.
The “margin” indicator shows how much profit 1 ruble of trade turnover brings.
And now about the markup
A markup is an addition to the price of a product, work or service being sold; it is the seller’s income, the difference between the wholesale price and the retail price.
The amount of the markup depends on the state of the market, the quality of the product, its consumer properties and the demand for this product. The markup is necessary to cover the seller’s costs of transporting the goods, storing them and making a profit. Thus, the amount of the markup can be calculated using the following formula:
Markup = selling price (RUB) - cost price (RUB)/cost price (RUB) * 100%
When setting a markup, it is necessary to proceed from the competitiveness of not only the product, but also the company itself in the market. It is important to take into account the strategic position of the enterprise's development relative to competitors. After all, competitors are those who trade the same product at a lower price, but in large volumes, and those who trade at a high price, but in small volumes. Ideally, the trade margin should be equal to a value that allows you to maintain a balance between the expected sales volume and the optimal price.
If you correctly set the trade margin for goods, work or services, then its value will fully cover the costs that a unit of goods brought, and will also leave the company with a profit from this unit.
The markup shows how much profit each ruble that was invested in the purchase of goods brought in. It, in contrast to the margin, is reflected in accounting under the credit of account 42, which is called “Trade margin”.
The margin is not reflected in accounting; it is calculated specifically when they want to find out the profitability of the company. In numerical terms, the amount of margin will always be equal to the amount of the markup, and in percentage terms, the markup will always be greater.
The relationship between M. and N.
If the margin is known, then the markup can be calculated using the following formula:
Markup = margin / (100 - margin),
Accordingly, if the markup is known, then calculate the margin:
Margin = markup / (100 + markup).
Margin (gross profit, return on sales ) - the difference between the selling price of a commodity unit and the cost of a commodity unit. This difference is usually expressed as profit per unit or as a percentage of the selling price (profitability ratio). In general, margin is a term used in trading, stock exchange, insurance and banking practice to denote the difference between two indicators.
Margin (PE) = OT - SS
Where:
OTs – selling price;
CC – unit cost of production.
Profitability ratio and profit per unit of production. When marketers and economists talk about margins, it is important to keep in mind the difference between profitability ratio and profit per unit on sales. This difference is easy to reconcile, and managers must be able to switch from one to the other. The marginality ratio (profitability ratio) is calculated using the formula:
Margin ratio (KP) = PE / OC
Where:
KP – profitability ratio in %;
PE – profit per unit of production;
OTs – selling price per unit of production.
Managers need to know margins to make almost any marketing decision. Margin is a key factor in pricing, return on marketing spend, profitability forecasting, and customer profitability analysis.
Gross margin in Russia. In Russia Gross margin is the difference between an enterprise's revenue from sales of products and variable costs.
Gross margin = BP – Zper,
where: VR – revenue from product sales;
Zper – variable costs for manufacturing products.
However, this is nothing more than marginal income, marginal profit (contribution margin) - the difference between revenue from sales of products and variable costs. Gross margin is a calculated indicator that does not in itself characterize the financial condition of the enterprise or any aspect of it, but is used in the calculation of a number of financial indicators. The amount of marginal income shows the enterprise’s contribution to covering fixed costs and making a profit.
Gross margin in Europe. There are discrepancies in the understanding of gross margin that exist in Europe and the concept of margin that exists in Russia. In Europe (more precisely, in the European accounting system) there is a concept Gross margin. Gross margin is the percentage of total sales revenue that a company retains after incurring direct costs associated with the production of the goods and services sold by the company. Gross margin is calculated as a percentage. These differences are fundamental to the accounting system. Thus, Europeans calculate gross margin as a percentage, while in Russia “margin” is understood as profit.
Under average marginal income understand the difference between product price and average variable costs. The average marginal income reflects the contribution of a unit of product to covering fixed costs and making a profit. The rate of marginal income is the share of the marginal income in sales revenue or (for an individual product) the share of the average marginal income in the price of the product. The use of these indicators helps to quickly solve some problems, for example, determining the amount of profit at various output volumes. The amount of marginal income shows the enterprise’s contribution to covering fixed costs and making a profit.
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What is margin?This term is used quite often in economics, commerce, and trading, but in each case it means slightly different things. Therefore, to avoid confusion and misunderstandings, this article covers all the meanings of the termmargin.
From this article you will learn what it is:
- business margin;
- margin in trading;
- margin trading;
Margin in business
Margin in business is the difference between the price and cost of a product. Margin and markup are sometimes confused. Let's explain the difference using the formulas:
Margin=(sale price-cost price)/sale price*100%
Extra charge=(sales price-cost)/cost*100%
The markup can easily be more than 100%, but the margin cannot be more than 100%, because in a profitable business the cost price is less than the selling price.
Let's look at an example:
| Cost, rub. | price, rub. | Markup, rub. | Markup, % | Margin, % |
| 25 | 50 | 25 | 100 | 50 |
| 25 | 55 | 30 | 120 | 54 |
| 25 | 60 | 35 | 140 | 58 |
Margin and markup are interrelated; an increase in markup leads to an increase in margin. Knowing the margin, you can calculate what the markup should be and regulate the selling prices of the goods.
For example, an enterprise wants to get a 30% margin when the cost of goods is 25 rubles. Then the calculations to determine the markup will look like this:
30%=(X-25)/X*100%
0.3X=X-25
25=0.7X
Selling price = 35 rub.
Markup = 10 rub. or 40%
Margin is also called return on sales and can be used to estimate sales growth. If the cost and markup do not change, then only an increase in the number of items sold leads to an increase in the margin.
Margin in trading
Margin in trading is the difference between the sale and purchase prices of securities,, spreads, .
When trading futures, the trader's account is adjusted daily by the amount of variation margin. If the trader makes a profit, then the variation margin is credited to the trading account. If a trader suffers a loss, the variation margin is debited from the trading account. Accrual/write-off occurs during clearing. Clearing (or clearing session) usually occurs once or twice a day, during which time no trading takes place.
The method for calculating variation margin is specified in the instrument specifications on the exchange website. For example,for a futures contract on the RTS index One of the calculation formulas looks like this: fig1
For the RTS index, the minimum price step is calculated using the US dollar exchange rate. This affects the financial result. If the value of the US dollar rises, then the value of RTS index futures falls and vice versa.
Specifications for futures contracts traded on the CME can be found on the Chicago Board of Trade website. exchanges
Margin trading
Margin trading is trading using borrowed funds provided by the broker. Brokers call margin trading “unsecured leveraged trades” or “uncovered positions in securities and cash.”
Why is margin trading needed?
If a trader has a small starting capital, the broker will be happy to offer to use leverage, because you will pay extra for these operations. For example, BCS offers all clients a leverage of 1:5, Sberbank offers 1:3, with the possibility of increasing to 1:5. These proportions mean that having actually 1000 rubles, a trader will be able to operate with capital of 5000 (3000) rubles.
The following concepts are closely related to margin trading:
- CRMS, CPUR, KOUR (more details below)
- discount factors or risk levels
- portfolio value
- initial margin
- minimum margin
- forced closure or margin call
What is CRMS, CPUR, KOUR
Based on risk levels, brokers divide their trading clients into categories. And they estimate how much funds can be set for margin trading.
- CRMS – To clients with With standard at equals Rclaim. Individuals with small start-up capital and lack of experience.
- KPUR – To clients with P elevated at equals Rclaim. Individuals with bABOUTmore money from 600 thousand rubles, with bABOUTMore experience from 180 days of active trading.
- KOUR – To clients with O myself at equals Rclaim. Legal entities.
For example, here is how the BCS broker explains the division into categories.
The use of borrowed funds for margin trading is a paid service. Brokers indicate the cost of using borrowed funds on the website and in the brokerage service agreement. Example from the Sberbank website:
Brokers take securities as collateral. The list of margin securities is also posted on the broker's website. These are the most liquid securities - “blue chips” - Sberbank, Gazprom, Rosneft, Lukoil.
For each such security, the broker develops discount factors or risk levels. Risk levels are needed to determineinitial and minimum trader margin(what is the initial and minimum margin is a few paragraphs below).
For example, three margin securities of the BCS broker for clients with a standard risk level.
Initial and minimum margin– terms related to the solvency of the trader.
Initial margin = value of the security*initial risk rate for this security
Initial Margin– part of the cost of a margin security that must be in the trader’s trading account. For margin securities you do not have to pay 100%; it is enough to make an initial margin.
Minimum margin = value of the security*minimum risk rate for this security
Various indicators are used to evaluate economic activity. 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.
It is necessary to periodically evaluate the financial activities of an enterprise. This measure will allow you to identify problems and see opportunities, find weaknesses and strengthen strong positions.
Margin is an economic indicator. It is used to estimate the amount of markup on the cost of production. 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.
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 when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:
H = (CP - C) / C x 100
How to find by markup
If you know the markup of a product as a 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%
Summary
The indicator is useful for small enterprises and large corporations to calculate. 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. It is calculated along with net and gross profit for individual products, product groups and the entire company as a whole.
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