What is meant by a price range
The trading margin: simple formula with pitfalls
The trade margin is an important metric for trading companies to measure the profitability of the company and individual products.
It is shown as a percentage and is also referred to as the margin. The absolute amount of the trading margin is called the gross profit.
Formula for the trading range
The trading margin is the difference between the net sales price (i.e. excluding sales tax) and the cost price (also excluding sales tax) in percent.
The gross profit is calculated as follows:
Gross profit = net sales price - net purchase price
So if a retailer purchases a product for € 250 (net) and sells it again for € 350 (net), the result is a gross profit of: € 350 - € 250 = € 100.
The trading margin is therefore: € 100 / € 250 x 100 = 40%
Trading range formula with variable factors
As simple as the formula itself is, it leads to a “milkmaid bill” for many - especially small - trading companies.
The problem here lies in the definition of the influencing factors on the cost price.
A positive influence for the retailer can be discounts for large quantities or the use of discount payments.
The cost price
Of course, there are also costs that have to be taken into account. That is why we speak of the cost price and not the purchase price.
These costs can be quite obvious, such as costs for packaging and shipping, unless these are separately passed on to the buyer.
However, import duties or calculated costs for spoilage or shrinkage (theft, damage, etc.) must be taken into account just as much as costs for distribution. For online retailers, for example, these are the fees for listing the products on Ebay, Amazon or similar portals.
Trading Range: The simple formula gets a little more complicated
The above-mentioned influences are quite manageable and can still be easily assigned to a commercial product. However, there are also other trading costs to be taken into account that the company has to bear and therefore have to reimburse.
These are, for example, costs for advertising and telecommunications.
One item that is often overlooked when making calculations is storage costs. Depending on the product, these can be a major factor.
The exact composition of the trading costs must therefore be carried out separately in each company and for each product. Once the cost is known, it is easy to calculate the margin with a small spreadsheet.
Trade margin formula does not include entrepreneur wages
The formula for the trade margin can therefore be used to compare products in terms of their profitability and from this the profit can be calculated.
However, the wages for the entrepreneur are not factored out here. In order to receive the real operating profit, the result must be adjusted for the imputed entrepreneur's wages.
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