Calculating and monitoring margin in complex products
Calculating or determining margin is something most companies don’t have much trouble with. Especially with direct purchases and sales, this is fairly straightforward. It becomes especially tricky when, as a company, you add value in the chain. Either because you assemble products or, on the contrary, make (custom) products from raw materials. The margin is then more than recovering at least the purchase price. Depreciation of machinery or equipment and, of course, the wage costs of employees must also be recovered with the margin. With complex or compound products, it is therefore important to monitor the margin so that too much discount can never be given and products are never sold below cost price. In this blog, we will discuss how to easily calculate the margin, as well as how to monitor it, so that you never prepare loss-making offers again.
Margin calculation, the most common method
For completeness, we will start at the beginning, the margin calculation. By margin, we obviously mean the difference between the purchase price and the selling price excluding VAT. We make a profit via the margin, but then the other costs incurred must of course first be deducted. Calculating the margin can be done in many different ways. But here we limit ourselves; via a fixed amount per product or component or via a fixed percentage on top of the purchase or cost price. One is not better than the other, it is mainly what works easiest for you or your company.
Whichever method you use, it is important to calculate the margin on the purchase price and not the selling price. This is especially relevant if it is common, or you plan, to work with discounts. By knowing the margin on the purchase price, you can avoid excessive discounts (including VAT) that can make the offer loss-making. Especially with composite or complex products, this is often tricky, as discounts are usually given on the final order.
This is what we are trying to avoid: suppose we work with a 20% margin on the cost price (excl. VAT), then we can never give a 20% discount on the selling price (incl. VAT). This is because the discount is then higher than the margin.
| Description | Amount |
|---|---|
| Cost price | €80,- |
| Margin | €16,- |
| Tax | €20,61 |
| Sales price | €116,16 |
| Discount of 20% | €23.23 |
| Losses (discount minus margin) | €7,23 |
Monitor margin, never sell below purchase or production price
Because the margin per part is included in the sales configurator, it becomes easy to monitor. In fact, a lower limit per part or composite product can also be added. In this way, the margin is monitored, and it becomes technically impossible to sell below the purchase or production price.
As soon as the margin falls below the set lower limit, you will see a warning stating that there is too much discount. Thanks to a smart authorisation process, it is even possible to link discount options to users. For example, resellers must request approval to give discounts above a certain percentage.
This is how it works in the product-configurator: an internal or external user (e.g. your dealer, reseller or foreign partner) establishes a configuration – possibly together with the customer – and uses it to automatically create a quotation. In this quotation, the user requests a discount. This request changes the status of the configuration from “Quotation” to “Authorisation required”. This authorisation can only be read by a user with more rights, e.g. a manager. The manager can then check whether the margin has indeed remained well enough monitored and approve (adjust or reject) the discount. The status changes from “Authorisation required” to “Approved”, allowing the user to continue with the configuration or send the quotation.
Authorisation with the online configurator: Authorisation rules can also be used with the configurator that can be implemented on your website. For example, it can be used to allow partial configurations by website visitors, which will appear in the system as “Quotation request”. The quotation request can then be completed with an inside sales representative and sent, after which the status changes to “Quotation”.
We are convinced that our software is the way to easily calculate and, above all, monitor your margin. Are you curious whether a configurator can work for you too? With the configurator checker you will have the answer to this question in just a few steps. Are you actually curious about how the configurator works? Request a demo!
What makes our CPQ software unique?
Why we simply have the very best solution:
In 2004, CPQing software development started. Today we deliver the fifth generation of the software and therefore remain the most modern configurator in the market. It is therefore impossible that competitors who have only been active for a few years in the market, have the same amount of functionality. That is why we use the motto: “We already have solutions for problems you have never thought about”. We can handle all your complexity of product and pricing rules.
Not the people from the IT department, but your people from the business know what information is needed to sell products and services. It is therefore these people who must be able to safeguard their knowledge in the configurator. Therefore, absolutely no IT knowledge is required to successfully set up CPQing.
CPQing provides you with a solution for a lower investment than you think. Our prices are much sharper than other suppliers in the market. We are happy to calculate this for you.
Deployment takes days, not weeks. Product and price rules are recorded in so-called ‘decision tables’. This is very simple and clear. Not only for products and services with few variants and options, but also for companies with greater complexity. Not only today, but also next year, when another user may have taken over management.
Where the competition is stuck in a single way of presenting information to the user, we offer you complete freedom. You want a different user interface for your internal employees than for your dealers or website visitors. We even enable you to guide end customers through the purchasing process. We call this “Form follows Functions”.
CPQing is a specialist in its field. We are proud of this. We do not want to be a disguised ERP- or CRM-system and therefore integrate seamlessly with all your applications for an optimal workflow. We deliver a cloud-based solution with an open API. Our people have the experience to automate your workflow as well.