The higher the value of the sales margin, the better it is for organizations. A higher sales margin indicates that your product or service has enough potential and is likely to be sold more.
How to calculate the Sales Margin?
Here’s how you can calculate sales margin:
Sales Margin % = [ (Revenue - COGS) / (Revenue) ] X 100
* Where COGS is the cost of goods sold.
For example, if a business earns revenue of $1000 and the relevant cost of goods sold is $650 a month, the sales margin of the business will be = (350/1000)*100 = 35%.
Why does sales margin matter?
Here’s why sales teams should focus on calculating sales margin:
1. Plan your pricing strategically
If you have a clear idea of sales margin, creating your pricing plan will become easier. If the price is too high for your target buyers, most of them will switch to your competitor, even though you might be selling a high-quality product. This results in a lower sales margin.
By monitoring sales margin regularly, sales professionals can identify this gap and plan to revise their pricing strategy. Alternatively, they can plan discounts and price-cut campaigns to attract more prospects.
2. Get a clear understanding of your business health
Sales margin provides you with a 360-degree overview of your business health. Suppose your product price matches your competitors, but the cost of goods sold is very high. This is pushing down the sales margin of your brand. By estimating the sales margin, you’ll get a clear idea of your COGS value and how to reduce it for a higher sales margin.
Tips to improve your sales margin
Here are 3 tried and tested tips to improve your business:
1. Simply increase your price
For most customers, the price of a product is directly associated with its perceived value. Hence, if a brand is confident about its product, it can gradually increase the price to boost the profit margin.
Brands hesitate to increase the price of products as they feel that customers may abandon them and switch to competitors. However, a strategic approach to increasing prices can lead to success. If your product has a good demand in the market, raising the price can be a smart way to maintain a high sales margin. A minor increase in price can lead to major changes in the profit margin.
Suppose you are selling product A at $10 at the moment. If you increase the price to $12, you will see the following changes in the profit margin:
With a 20% increase in product price, brand A can boost its profit margin by 6.6%.
2. Focus on increasing the reliability of your brand
Brands that focus on establishing trust often achieve long-term success. You can win prospects' reliability with little changes in your website, social media platforms, and sales pitch decks.
Some quick tips for implementing trust elements are:
- An authentic homepage with lots of social proof to create a remarkable first impression.
- Simple product and solution pages with all the required information.
- Adding your background and brand story to the website for creating an authentic presence.
- A transparent pricing strategy that is easily understandable by the potential customers.
With these simple steps, you can win buyers’ faith and gradually increase your sales margin with repeat purchases and higher customer retention.
3. Increase the AOV (Average Order Value) of your products
Increasing AOV can also be a smart way to increase profit margin.
Average Order Value = (Total revenue / number of orders)
The higher the value of AOV, the more the revenue will be. Therefore sales margin will also be higher, provided the COGS remains constant.
Now the question is, how to increase AOV? Here are a few tips:
- Start focusing on up-selling and cross-selling. Brands can pitch added benefits, product bundles, and complementary products to customers to increase AOV and boost profit margin.
- Many brands offer minimum order incentives to customers. For example, if you roll out an offer that says, “Spend a minimum of $100 to win a discount of 15%”, you attract lots of potential customers who are looking for a discount. This type of strategy can instantly increase the AOV of a product.
- Brands can also run referral campaigns to boost AOV. Referral campaigns aim at loyal customers of a brand. The idea is to offer them incentives like special discounts, price cuts, etc., for referring a brand’s products to new potential customers.
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