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What is margin and marginality?

Margin and marginality can easily be confused, but they are different concepts. In the LLC «ElectraQuix» blog we talk about how to calculate them and what to look out for when analysing these indicators.

Profit margin
Margin is the difference between the cost of goods and sales. It is expressed in monetary units and allows you to see how much the company has left from the sale of goods or services after deducting variable costs. Variable costs are the costs associated with producing and selling a product. They most often include the cost of raw materials, fuel, packaging, transport, salaries of managers who receive a percentage of sales, etc. The components of variable costs can vary - it all depends on the structure and specifics of the business.
The formula for calculating margin is as follows Margin = turnover - variable costs

Let's say you sell tea and coffee gift sets online. The variable costs would be
  • The cost of the tea and coffee used in the sets;
  • The percentage of sales taken by the manager who takes and processes the orders;
  • the cost of packaging and delivery.

Let's calculate the margin using the formula for 2 months:
  • In January the revenue from the sale of the kits was 25 000 hryvnias and the variable costs were 11 000 hryvnias. Margin = 25 000 - 11 000 = 14 000 hryvnias.
  • In February the revenue from the sale of kits was 30,000 hryvnias; variable costs - 15,000 hryvnias. Margin = 30 000 - 15 000 = 15 000 hryvnias.
So we can see that the margin increased in February compared to the previous month. But is this good or bad? The fact is that these absolute figures do not show the efficiency of the company. In order to compare two months correctly, it is necessary to calculate not the margin, but the marginality.

Marginality

What is marginality in simple terms? It is a measure of profitability. Marginality is expressed as a percentage and allows you to judge how profitable or unprofitable it is to sell a product.
  • The formula is as follows Marginality = Margin / Turnover × 100%.

Let's go back to our example of calculating margin for two months. To compare January and February in terms of efficiency, let's calculate the margin for each month:
  • January: 140,000 / 250,000 x 100% = 56%
  • February: 150,000 / 300,000 x 100% = 50%
It is clear that despite the increase in turnover and margin, the margin rate has decreased in February. This suggests that you are losing a lot of money on variable costs. Perhaps the cost of materials and courier services has gone up and you haven't noticed. Adjust these things so that your margins grow with your sales.

The margin indicator allows you to assess the efficiency of the company's work and analyse the situation on the market. In this way, you can keep things under control and make adjustments in good time.
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