Variants of margin, which are they? (42)

To address the topic margin variants, it is first necessary to clarify what margin it refers to.

Margin, or sales margin, in pricing is all the absolute or relative value added to the cost of a product, merchandise, or service to obtain its sales price. From another angle, it is the difference between the price and the cost of the sale object.

Therefore, from a pricing perspective, some margins do not represent the transaction’s net profit. That is because these margins include certain expenses beyond its profit, as occurs with some types of markup and contribution margin.

Another point to highlight is that even when the term margin is applied in the sense of net profit, it will refer to only one of the returns that can be assigned to a given operation. Some samples of this range of options are the net margin at full cost, the margin on net revenue (usual in financial market analysis), the margin at replacement cost, the margin based on standard cost, and the after-tax margin on the profit.

Four types of margins on the sales price are of great relevance to the pricing manager: the net margin, the gross margin, the markup margin, and the contribution margin.

Each of these margins is related to one of the cost types mentioned in the post about cost variants. The net margin is calculated based on the full cost, the gross margin based on the cost of the product, merchandise, or service sold, or the cost of the sales object itself, the markup margin from the base cost of the markup, and the contribution margin on the base cost of the contribution margin.

Moreover, one can compute these same margins using different calculation criteria—most already mentioned—constituting the margin variants, as shown in the following table.

Operationally, such a variety of criteria only means that regardless of the margin species and its base cost, one can calculate it from the actual cost as the standard cost, the budgeted cost, or the target cost. 

Similarly, its inputs can be valued at average cost as the most recent, the replacement, and the arbitrated cost. From another part, the price or revenue that serves as the basis for calculating the margin may or may not include taxes and other sales deductions (returns, discounts, and rebates).

C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.