Price margin (also called gross margin) is the part of a product or service’s price in excess of cost, expressed in dollars or as a percentage of the price. Businesses normally use markup formulas to add predetermined percentages to an item’s cost to arrive at a price. Not all products in a business’s inventory carry the same markup or price margin. Savvy businesspeople calculate price margins to provide information for analyzing the relative profitability of different products, whether the margin is generating a net profit over expenses, how much to discount prices for sales and much more.
Determine the cost of a product or service. Cost includes the expense of materials and labor for processing or manufacturing. Depending on the product and nature of the business, cost may include factors such as breakage or spoilage. For example, if you pay $5 per item for materials, $1,000/week in labor for processing of 500 units ($2/unit) and $1/unit for spoilage and other expenses, your total cost works out to $8/unit.
Subtract the cost of the item from the price. The result is the price margin of the product in dollars. If an item has a cost of $15 and a price of $25, you would subtract $15 from $25 to arrive at a price margin of $10.
Express profit margins as percentages. Simply divide the price margin in dollars by the total price and multiply by 100 (or use he percentage key on your calculator). If the price is set at $25/unit with a price margin of $10/unit, divide $10 by $25 to get 0.40. Multiply 0.40 by 100 to get the percentage (40 percent).
If you use a markup formula that determines cost in the same way that is needed to calculate price margins, you can save time by using the markup cost figure and skip Step 1.