What is margin?

Margin is the difference between what you charge for a part and what it costs you, per piece at a given quantity or across an order. As an amount it is selling price minus cost. As a percentage it is normally taken over the selling price: a price of 125 euros on a cost of 100 euros gives a 20 percent margin. The same gap taken over the cost, 25 percent, is a mark-up. Which margin you see depends on which cost you subtract: full cost, variable cost only, or the cost of sales.

How does margin work in practice?

The margin on a quote is a pricing choice or, at a market price, what is left over; it does not follow from a formula. Because it rests on an estimated cost, the margin actually earned only shows in post-calculation. Many shops set a band per kind of work, customer or risk and choose within it per quote. A flat percentage across all quantity breaks gives the highest margin per piece at the smallest quantity, where the cost per piece is highest, but the lowest per order. Costs that fall per order or per quote and sit outside the cost price, such as quoting work and order handling, weigh more on small orders; whether you cover them through margin, a mark-up or a minimum order value is a choice. If profit hides in the hourly rate, the cost looks higher and the margin lower than they are, and post-calculation no longer shows what an order really earned. Because margin and mark-up are often used loosely, state what any percentage is taken over.

What is margin often confused with?

Mark-up and margin express the same gap in different ways: a mark-up as a percentage of cost, margin as a percentage of the selling price. A risk allowance, by contrast, covers a named uncertainty in the work, such as a tight tolerance or an unfamiliar finishing step. And margin on full cost is not contribution margin, which deducts only variable costs.