What is retailer margin?
Retailer Margin · Also called retail margin, store margin, retailer markup, retail gross margin
Retailer margin is the retailer's selling price minus what it paid for the product, as a percentage of the selling price. It is the retailer's gross margin, not its net profit.
What it is
If a retailer buys your product for $3.60 and sells it for $6.00, it keeps $2.40 of gross profit per unit, a 40% margin. That $2.40 still has to pay for the store's labor, rent, shrink and other costs, so it is not what the retailer earns.
Margin is a percentage of the selling price. Markup is a percentage of cost. The same $2.40 is a 40% margin on the $6.00 price but a 66.7% markup on the $3.60 cost. Some buyers quote a markup rather than a margin: a 14% markup on cost works out to only about a 12.3% margin on price.
In a planning model you can work from SRP, as long as you label it as an assumption. The margin the retailer actually makes depends on the price it actually charges.
Why it matters
Retailer margin is usually the biggest single slice of your SRP. The buyer uses its margin target to turn your price into a shelf price, or to tell you what price you need to quote to hit a given shelf price.
If your price leaves the retailer short of its target, the buyer will either put you on shelf higher than you planned or ask you to cut your price. Confirm whether the target is a margin or a markup before you quote.
Formula
Retailer margin % = (Selling price − Retailer buying price) ÷ Selling price
Retailer markup % = (Selling price − Retailer buying price) ÷ Retailer buying price. Selling price needed for a target margin = Retailer buying price ÷ (1 − target margin).
Worked example
Margin versus markup on a $6.00 product
- Assume the retailer buys your product for $3.60 and sells it for $6.00.
- Retailer gross profit = $6.00 − $3.60 = $2.40 per unit.
- Retailer margin = $2.40 ÷ $6.00 = 40%. Markup on cost = $2.40 ÷ $3.60 = about 66.7%.
- If someone adds a 40% markup to $3.60 instead, the price is $3.60 × 1.40 = $5.04. The retailer keeps $1.44, a margin of $1.44 ÷ $5.04 = about 28.6%, well short of 40%.
- If the retailer later drops the shelf price to $5.00 while still paying $3.60, its margin falls to ($5.00 − $3.60) ÷ $5.00 = 28%. Your invoice price does not change unless you agree to fund the cut.
Common mistakes
- Confusing margin with markup. A 40% retailer margin is not $3.60 plus 40%; it means the retailer's buying price is 60% of its selling price.
- Treating the retailer's margin as its profit, or as a cost on your own P&L. Your revenue starts from your own invoice.
- Assuming every retailer uses the same target. Ask each buyer for theirs rather than reusing one percentage in a final quote.
- Assuming a price cut on shelf is funded by the retailer. If the promotion is brand-funded, check the actual allowance you agreed to.
Common questions
- Does retailer margin include my trade spend?
- No. Slotting, promotions and other allowances have their own terms and come out of your share. Model each agreement on its own line, and count each allowance once.