The marketing margin of a product or service is the difference between the retail or selling price of the product and the actual cost it took to produce that product. The production costs take into account the average unit cost in terms of operating expenses, manufacturing and packaging. The retail price or selling price reflects the mark-up on the cost of producing that product. In some cases, business owners do not calculate appropriate production costs or set high enough marketing margins, causing them to lose money or simply break even over the long run. To set your marketing margin high enough, there are a few things you need to calculate beforehand.
Calculate your fixed expenses. Fixed expenses are costs that remain the same from period to period and are paid on a regular basis, such as vehicle expenses, rent, telephone, electricity, utilities and so on. Add all fixed expenses to get your total fixed expense amount.
Calculate your variable expenses. These are fluctuating costs that increase as production increases, such as wage expenses, materials and supplies, equipment and fuel. Add up all of your variable expenses for the current period to get your total variable expense amount.
Add the total fixed expenses and the total variable expenses together to get the total cost of production.
Divide the total cost of production by the total number of units produced. This will give you your cost per unit.
Calculate the marketing margin by subtracting the cost per unit from the selling price. For example, if the selling price of a product is $5 and the cost per unit is $3, you would calculate $5-$3, which gives you $2. In this case, the marketing margin is $2 per unit. This means that you are making $2 for every product unit that you produce and sell.
Calculate your break-even analysis point. The break-even analysis point finds the relationship between the total revenue and total cost to determine the profitability at different levels of output. In other words, the break-even point is the starting point of growing your marketing margin. To calculate the break-even point, subtract the unit variable cost from the unit price and divide that by your total fixed costs: Fixed cost/(unit price-unit variable cost).
Adjust any of the variable costs, fixed costs or selling price of the unit to produce different marketing margins. To earn a larger marketing margin without changing the unit price, you will need to reduce either your fixed costs or variable costs. To maintain your variable costs and fixed costs while increasing the marketing margin, you must increase the price per unit.