Sales margin is the amount of profit generated from the sale of a product or service. It is used to analyze profits at the level of an individual sale transaction, rather than for an entire business. To calculate the sales margin, subtract all costs related to a sale from the net amount of revenue generated by the sale.
The exact components of this calculation will vary by the type of business, but will generally include the following items:
- Sales discounts and allowances
- Cost of goods or services sold
- Salesperson commission
= Sales margin
To calculate the sales margin on a percentage basis, divide the sales margin derived in the preceding calculation by the net sales figure.
For example, a company sells a consulting arrangement for $100,000. As part of the deal, the customer is granted a 10% discount. The company incurs $65,000 in labor costs related to the arrangement. There is a 2% commission associated with the sale. The resulting sales margin calculation is:
+ $100,000 Revenue
- 10,000 Sales discount
- 65,000 Labor costs
- 2,000 Commission
= $23,000 Sales margin
Sales margin can be calculated for an individual sale transaction, or for a group of sales. For example, a company may have sold software, training, and installation support as a package deal to a customer. In this case, the sales margin for the entire sale package is the most relevant, since the seller might not have been able to complete the sale unless it included all of the components in the package.
Another variation on the calculation is to compile the sales margin by salesperson. This can be useful for determining salesperson performance levels, or for the calculation of various commissions or bonuses.
The sales margin calculation is only an intermediate-level margin; it does not include a variety of unrelated or overhead costs, and so can yield margins that are not indicative of the overall profitability level of a business. For this more comprehensive view of profitability, one should compile the net profit margin.