"Retail margin" is the gross margin a retail business receives when selling goods. It is the difference between retail price and the costs of goods sold. To achieve strong margins, retailers must minimize acquisition costs and optimize perceived quality among consumers.
The formula for calculating retail margin is the sales price of an item minus COGS, divided by the sales price, multiplied by 100. If you sell an item at $20 and paid $10 to acquire it and sell it, your retail margin is $10 divided by $20, or 50 percent. Retail products have variable margins, even within the same store or department.
Markup to Margin
A key factor that influences the margins on retail products is the markup percentage the retailer applies to particular goods. Calculating markup is essentially the inverse of calculating retail margin. You subtract your COGS from your desired sales price in the same way, but then divide that amount by your COGS. If your target price is $20 and your COGS are $10, your markup is $10 divided by $10, or 100 percent. Thus, to achieve a 50 percent margin on an item that costs you $10, you need a 100 percent markup.
Margin and Demand Factors
Setting target margins and weighing them against projected customer demand are key strategic aspects of running a retail business. If you mark up items too much, you may achieve strong per-unit margins, but your overall sales volume is likely to be low. Finding the sweet spot between strong margins and strong demand contributes to a profitable retail business.
Specialty retailers focus on particular products or product lines. If you specialize in offering variety, assortment and quality on particular items, you normally need strong retail margins based on your limited offerings. A discount or department store that offers goods in many categories often uses low-margin products to entice shoppers. The hope is that those customers also buy high-margin items that more than make up for the low-margin transactions.
A number of factors influence retail margin on particular goods. An exclusive or patented item typically has higher margin potential than a commodity that many retailers offer, for instance. The bargaining power of a retailer relative to its vendors impacts its retail margin as well. Negotiating a $5-per-unit cost as opposed to a $7-per-unit cost on a particular item means $2 more per sale in gross profit.