In marketing, margin is usually refers to the term profit margin. Profit margin is used to describe or measure the profitability of a business. Profit margin can further be broken down into two types, which is gross profit margin and net profit margin.
Gross Profit Margin
Gross profit margin refers the ratio used to assess the profitability of a business. It involves taking into account the total revenue and cost of sales. This is used to indicate the profitability of selling the goods and services compared to the cost of acquiring and selling those goods and services.
Fixed costs do not factor in when computing for the gross profit margin. To compute for gross profit margin the cost of sales is subtracted from the total revenue and the difference is then divided by the total revenue again. Note that the cost of sales includes only the amount of money paid out by to company for the goods and services that was already sold.
Net profit margin
Net profit margin takes into account not just the cost of sales but also the fixed costs such as operating expenses. The net profit margin is computed by dividing the net profit (taxes should have also been subtracted beforehand) by the total revenue and multiplying the ratio by 100. The percentage indicates how stable or safe the company is in terms of profit. A low profit/safety margin means greater risk while a higher profit margin means less risk.
