What Is the Manufacturer Margin?

Margin generally refers to the difference between what a company makes or buys a product for and how much it gets on a sale. The expression "manufacturer margin" typically refers to the markup a manufacturer charges on goods produced. Maintaining a significant gross margin is important to long-term manufacturer profitability.

Companies calculate three levels of profit -- gross, operating and net. While net profit is the number that matters in the long run, generating a strong, consistent gross margin contributes to that end. If a manufacturer can produce a widget at a cost of $15 and sell it at a price of $25, it makes a $10 gross profit. Gross margin is the percentage of revenue converted to gross profit. In this case, you have a gross margin of 40 percent.

To maintain strong margins, manufacturers must control costs. Costs of goods sold for a manufacturer are derived largely from the cost of materials. Developing relationships with quality, efficient, valuable suppliers is central to margin success. In some cases, you can get lower costs per unit with bulk buys if you sell enough volume. Manufacturers that brand themselves as top quality, however, have to exercise caution when focusing only on the cheapest materials.

On the other side, you need to drive strong, consistent revenue to earn solid gross margin. A manufacturer's traditional buyer is the wholesaler. To build enduring relationships with buyers, a manufacturer needs to balance a profitable markup with a reasonable cost for the buyer. Some manufacturers look to skip over the wholesaler and sell directly to a retailer or end consumer as a way to make more on sales. Higher margins also are more common for high-quality manufacturers relatively to low cost, efficiency-driven producers.

As a manufacturer looks at its gross margins, it needs to assess needs for adjustments. The challenge is figuring out whether a particular margin is good or bad. Typically, you compare your current period margin against recent periods to see whether your margins trend higher or lower. Also, your margins ideally are higher than competitors in your industry. Manufacturer margins can vary greatly across industries, so intra-industry comparisons are helpful.