MARK UP % AND NET MARGIN %

There are two types of margin every retailer uses to arrive at the net selling price i.e the selling price before application of tax. Now we can see what is mark up % and net margin % , their application in retail and how to arrive at selling price from net selling price

MARK UP % 
This is the percentage of increment applied on the cost i.e. the landed cost. It is calculated from the cost price to arrive at the net selling price and tax is applied on the net selling price to arrive at the actual selling unit retail.

Mark up % = {(Net selling price - Unit Landed Cost)/Unit Landed Cost} x 100

To calculate Net Selling Price using markup %

Net Selling Price = Unit Landed Cost x (1+mark up/100)

Unit Selling Price = {Unit Landed Cost x (1+[mark up/100])} x {1+(vat rate/100)}

To calculate mark up % from net margin % = Net Margin / {1-(Net Margin/100)}

Illustration : The landed cost of a product purchased is 500 Rs. and the net margin percentage of the product is 20% and the vat % is 14%. Now we shall calculate the unit selling price of the product :

Mark up %  = 20 / {1-(20/100)}
                    = 20 / {1-(0.2)}
                    = 20 / {0.8}
                    = 25 %

Unit Selling Price = {500 x (1+[25/100])} x {1+(14/100)}
                              = {500 x (1+[0.25])} x {1+(0.14)}
                              = {500 x 1.25} x {1.14}
                              = 625 x 1.14
                              = 712.5 Rs.

NET MARGIN %
This is the percentage of margin made or the percentage of gross profit made upon sale of a product. The difference of net margin % from mark up % is that net margin % is calculated as a percentage of net selling price rather than landed cost.

Net Margin % = {(Net selling price - Unit Landed Cost)/Net selling price} x 100

To calculate Net Selling price using Net Margin %

Net Selling Price = Unit Landed Cost / (1 - Net Margin)

Unit Selling Price = {Unit Landed Cost / (1 - [Net Margin/100])} x {1+(vat rate/100)}

To calculate net margin % from mark up % = Mark up / {1+(mark up/100)}

Illustration : The landed cost of a product purchased is 500 Rs. and the mark up percentage of the product is 25% and the vat % is 14%. Now we shall calculate the unit selling price of the product :

Net Margin % = 25 / {1+(25/100)}
                        = 25 / {1+(0.25)}
                        = 25 / {1.25}
                        = 20 %

Unit Selling Price = {500 / (1 - [20/100])} x {1+(14/100)}
                              = {500 / (1 - [0.2])} x {1+(0.14)}
                              = {500/0.8} x {1.14}
                              = 625 x 1.14
                              = 712.5 Rs.

SL NO	MARKUP %	NET MARGIN %
1	It is applied on Unit Landed Cost	It is arrived from Selling Unit Retail / Net Unit Retail
2	It can be more than 100 %	It is always less than 100 %
3	Cannot be used effectively for discount% calculations from selling price as it can be more  than 100 %	It is more effective for applying applied discount% from selling price
4	Used when Mark up calculation method used is COST	Used when mark up calculation method used in RETAIL

GATE KEEPER MARGIN

Gate Keeper Margin is a retail term used to set a Fixed Margin level below which the margin should not drop i.e. the minimum expected 'net profit after tax' a retailer expects to make from the sale of goods or service.
This can be defined at SKU location level or at department location level and used as a alert mechanism or a hard stop mechanism.

We can use GKM to arrive upon our suggested selling Retail for every SKU listed in the merchandising system as calculated below :


Suggested Retail = [Unit cost x (1+{Vat rate/100})]/[1-(GKM/100)]
                            = [1800 x(1+{14/100})]/[1-(25/100)]
                            = [1800x1.14]/[0.75]
                            = 2025/0.75
                            = 2700 Rs.

So the retailer should sell the product at a minimum of 2700 Rs. To ensure the GKM is maintained at 25% Retailers can use this to put control on the Purchasing Cost based on the recommended retail price and GKM agreed

The below formula can be used to arrive at the GKM or Fixed Margin obtained from unit retail and unit cost of a product

GKM = [Unit Retail - (Unit cost x (1+Vat rate/100))]/Unit Retail

SALES MARGIN CALCULATION

I have asked this question to my seniors and have been asked this question by my colleagues. I thought I can share my knowledge on the same in this forum, so that it can serve the people looking for knowledge in fundamentals of Retail :

What is Sales Margin ?

It is the gross profit acquired from sales after VAT, in short terms it is earnings before interest, taxes (other taxes incurred by organisation apart from taxes on sale of goods), depreciation, amortisation (EBIDTA) and OPEX (operational expenses)

At times retailers do add their OPEX and other over head expenses as a percentage to the landed cost of the product , thereby leading to higher UNIT COST. So the margin in this case will be NET MARGIN i.e. sales margin after Tax

Sales Margin is always represented in percentage (%)

Below formula will help you understand the calculation of NET MARGIN :

NET MARGIN % = { (NET SALES - COGS) / (NET SALES) } x 100

Where NET SALES = Selling Retail / (1+(vat rate/100))

COGS is cost of goods sold i.e. the unit cost at which the product is being sold