Profit Margin

Long ago when I worked at a retail computer store, our store had a minimum profit margin on computer sales of 20% (that alone should tell you this is a LONG time ago). All the salesmen had to obey the rule of not selling a computer at less than 20% profit. I had a fancy HP-35 calculator so I could quickly add delta +20%, delta +21% if I wanted a 21% profit, etc. The other salesmen used standard calculators. They always tried to grab my customers, somehow their quotes for the same products would be less, and my customers would buy from some OTHER sales guy for less than I’d quoted them the day before. It was infuriating. And the boss was especially infuriated because none of the salesmen could meet their margin quotas, so he started withholding their commission on low profit deals, which just added to the vicious circle of pissed offedness.

So one day, I caught a salesman doing a calculation, and I was shocked what I saw. He calculated 20% margin on a product by multiplying cost times 1.2 to get the retail price. So I asked him, if I sell a product for $100 at 20% profit margin, what’s the cost? He shot back the correct answer, $80. I said ok, now type $80 into your calculator and multiply it times 1.2. Answer, $96. Oopsie.

I reported to the boss what I had seen. He hit the ceiling. When he calmed down, he made me go around the sales floor with him, and he demanded that every single salesman go through the same routine. What’s the cost of goods on a $100 sale at 20%? Now use your calculator to compute 20% margin on an $80 item. Oopsie, $96 is wrong. Every single salesman was a math moron, they ALL were calculating it the wrong way. And then I had to teach them the proper calculator method while Mr. Tyrant Boss watched over us, and he was not satisfied until every salesman demonstrated an ability to calculate the correct profit margin TWICE on his own. The correct formula to calculate a retail price with 20% margin is 1.25 times cost. None of the salesmen believed this was correct until I made them multiply 80 * 1.25 and it came out to 100. Some of the cleverest salesmen asked me how I’d calculate an arbitrary profit margin, like 21%. So I had to demonstrate that too.

Over the next few weeks, my sales skyrocketed. My own customers were no longer able to undercut my prices merely by asking a different salesman to quote the same equipment. This was a huge relief because in the past, I’d do all the prep work and the other sales guy would walk off with all MY profits with no effort except to multiply times 1.2.

10 thoughts on “Profit Margin”

  1. Can you explain how you would work out 80%? Because traditionally for example $46 x .8 the result is then added to $46 & there’s your answer!
    Yet I can’t follow your math! You have us very confused & eager for an explinaion!

  2. If you want an 80% profit margin from an item that is $46 wholesale cost, you can’t just add (.8 * $46) + $46 = 82.80, that is only 44% profit margin. The profit margin is (.8 * $46) = 36.8, to calculate the margin percent is (36.8 / 82.80) = 44%.
    An 80% profit margin means that your cost ($46 in this example) is 20% of the total sale price. The solution is simple algebra, the target price X is calculated as 0.2 * X = 46. Multiply both sides of the equation by 5 to factor out the 0.2 and you get X = 230. Your target price is $230. There is probably a simpler way to calculate this, but algebra makes a clearer proof of the concept.

  3. Now you have got me confused, If an Item is selling at $1.30, the cost of the item is a 1.00 then isn’t the profit margin 30%?
    [The profit margin is 23%. Let me put it another way, your profit percentage is .30 out of 1.30, not .30 out of 1.00. –Charles]

  4. Can you give me a excel formula so that I can get the sale price for a specific margin requirement? I want to change that field from say 55 points to 60 points or some other margin requirement. E.G. my cost is $8 and I want 55 points or 65 points or 72 points etc.
    [I created a small downloadable Excel spreadsheet to demonstrate the formula. –Charles]

  5. I have been looking for this for a very long time…this equation is imperative to my work and I just could not figure how how to get an excel formula together for it.
    Thank you so much for taking the time to post this!!

  6. Item was sold at:
    286.30 cost of item
    213.70 Profit
    What is the formula to figure the percentage of profit made?
    The formula I use says that I made .4274 % on above sale – Please tell me if right or wrong – if wrong what is the basic formula?
    Thank you, Nancy
    [You are correct, aside from misplacing the decimal point. Your profit margin was 42.74%, not 0.4274% –Charles]

  7. The easiest way that i’ve found is to simply divide the cost by the reciprocal. For example, if I have an $80 product that I want to sell at 20% margin, I would use $80 / 0.8, which equals $100.
    Sorry for the late post…

  8. Margin & Markup explained:
    Basic difference between margin and markup is that the margin percentage of the selling price is clean profit i.e
    Cost=$100, Selling Price = $150. Profit is $50 which is 1/3 of the selling price. Margin = 33.33% – (the calculation is $100 / 0.66) iow (1-.33 = 0.66)
    Cost=$100, Selling Price = $150. Profit is $50 which is 1,5 times or 50% more than the cost price, therefore Markup = 50%. (the calculation is $100 x 1.5 or $100 +50%)
    80% margin would be $100/0.8 = $125
    Bean counters prefer Margin as the higher the %, the more OPEX it covers. Work it out, up to about 25% there is not much difference in the selling price, but then it increases dramatically as the % value gets bigger.
    All business owners should work on Margin as it is easier to see what your company is doing – $1,000,000 turnover and the margin is 25%, then your Gross profit is 25% of $1,000,000 = $250,000. Much easier to calculate. Try doing Markup with odd figures
    All sales people love to blame pricing as a factor for poor performance and the opposition is always cheaper. A spreadsheet I would like to see is one similar to your Price and Profitability Spreadsheet, that calculates how much additional revenue turnover one has to do when giving a discount, to achieve the same profit $ value without discount.
    Thanks Rudi

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