What Is the Marketing Margin?
Marketing margins are calculated by small businesses in nearly every industry. Marketing margins identify the disparity between the cost of purchasing items wholesale and the income made by selling them. Your marketing margin reveals the real cost of marketing and supplying a wholesale purchase product line to the public.
The function of a marketing margin is to assist in the calculation of how much funding can be dedicated to bringing a given product to market. The gap between what you pay to purchase the goods you sell and what you charge the public to buy them is where this funding comes from. If your margins are too small to cover the cost of advertising, storing and selling your goods, either your retail prices will have to rise or your marketing budget will have to be cut. The marketing margin directly effects the types and amount of marketing that your small business can produce and distribute.
The amount of money spent on marketing and all the various expenses involved with taking a product to market must be weighed against the potential profits to be gained. The costs of merchandise can vary by supply and demand, season and the types of goods sought. Fuel prices, market trends and availability are always prime factors in the equation and must be included in the calculation as part of the current retail environment. These fluctuating costs mean that your marketing margin can change from month to month and is not a set constant. Understanding those factors that influence your overall budget can help you to forecast marketing margins year over year.
Marketing margins can help small businesses to determine which products they can and will stock for sale and which may prove too expensive. The more your initial wholesale purchases cost, the higher the risk you take as a business. Any funds laid out to acquire new products must be added to the current cost of running the business until those funds are recouped as the products are sold at retail. With less cash to fund your marketing and promotional efforts, the margin shrinks. You can only tighten your marketing margin so much before there is not enough funding to run your campaigns.
In the agriculture industry, marketing margins can take on a slightly different meaning. Since produce is grown rather than built or bought wholesale, the marketing margin lies between the price that a small organic or traditional farmer would get selling her stock directly to a wholesaler at harvest versus the cost of taking it to market and selling it retail. The cost of packing, shipping and finding retail space to sell the crop can be significant even if the sale price is much higher than wholesale. Understanding the marketing margin for produce helps small farm businesses learn whether direct to market will work for them.