Retail Dogma

Intake Margin: How to Set it Right?

Intake margin is the margin you get with the initial price you set when you first receive the product. That’s why it is called “intake” margin.

It is an important figure for any retail or e-commerce manager, because it plays an essential role in retail budgeting, buying and pricing.

Retailers understand that setting a product initially at a certain intake margin does not mean that this is the margin that they will realize at the end of the year. This is because typically any product will go through a cycle of promotion and discounts before it is completely sold out.

That’s why the margin that is actually realized from trading is given another name: “Realized Margin”.

Learn More: Gross Margin Types: Intake Margin vs. Realized Margin

Intake Margin Formula

Intake Margin (%) = (Initial Price – Cost Price ) ÷ Initial Price x 100

Example

You bought a product for 30$ from the supplier and priced it initially at 100$

Intake Margin = (100 $ – 30 $) ÷ 100 $ x 100 = 70%

How to Set The Right Intake Margin?

As we said, setting the right intake margin will affect the end of year margin you will realize from your products. It is very important to take into consideration all the markdowns you are planning to do and factor them into your initial price.

Here we will show how to do this with an example using our markdown planning tool, but you can also do all the calculations manually.

Step 1: Determine Your Target Margin

What is the target realized margin you want to get at the end from this product or product category? You should have already determined that through your pricing process. Let’s assume you determined that the end (realized) margin for your toys order is 55%

Read more in our free article on pricing considerations

Step 2 : Determine Your Markdown Level

  • How many times are you going to discount these products in the year/season?
  • How deep is each discount going to be?
  • How much of your order are you going to sell at each level of discounting?

You should already have this information from your marketing calendar and sales budget. Your events calendar will tell you how many events (promotions) you will run and how much discount will be given in each event.

Markdown planning & intake Margin

Let’s say you determined the following:

Zero Discount: 20% of the order is expected to sell at full price, i.e without any discounts

1st Markdown: Mid Season Sale (MSS) at 25% off: you plan to sell 30% of your order in this event

2nd Markdown: Flat 30% off event: You expect to sell 20% of your oder in this event

3rd Markdown: End of Season Sale at 75% off: you plan to sell 30% of your order in this event

You will enter all this data into the planning tool

Step 3: Set Your Price

After you have entered all the discount events that you are expecting to run, the tool will calculate your realized margin based on the intake margin you set. You will need to adjust this intake margin until it gives you the target realized margin that we have determined in Step 1.

For example: Here it shows that with all those events, if you set intake margin at 56%, you will realize 31.25%. This means you either have to price at a higher level (increase the intake margin), reduce your level of discounting or do both.

negative margin

This process also helps in letting you see the end picture right from the start, so you can always go back and adjust your discount level or the frequency of your markdown events, in order to reach your margin goals at the end of the year.

For example: You might find that the initial intake margin your are setting, together with the level of discount you are planning, will result in actual loss on your inventory (see pic above).

It should be noted that simply increasing your intake margin to any level, so that you realize a certain margin is not realistic. That’s because there is always a ceiling for the price of any product (see our pricing guide – premium) based on the product and the market.

This is why in many cases you will find yourself adjusting both, the intake margin as well as the markdown level, in order to achieve your goal.

Why Is This Important?

As you have seen from this article, you only sell a small portion of your order at full price, the rest is selling at different margin levels throughout the year, and the end realized margin is totally different from the initial intake margin.

People often fall into this trap and fail to set their pricing correctly or fail to tailor their markdown strategy for optimum profitability. They end up setting a price and expecting to realize that amount in profit, when in reality the realized amount is far lower and hence also their final P&L will look much different than expected.

In some extreme cases, as the one above, setting the wrong intake margin or running excessive promotions and discounts can result in actual losses on your inventory investment after it’s all said & done.

That’s why you should always plan ahead and work out your plan.

We always recommend having a comprehensive, interconnected planning strategy that connects budgeting to buying & pricing, because they all affect each other.

Sales budgeting will affect your buying, and your buying will affect your margins, which are also affected by your pricing, and your margins will affect your final profitability.

It is all connected.

Access our members area for an all-in-one package of tools, templates and guides that will help you in your planning process. From sales budgeting, pricing, markdown planning, cash flow planning to final P&L budgeting.

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