How to use the weighted average margin calculator
- List each product or line with its revenue for the period.
- Enter each product's margin as a percent of its revenue. Gross profit divided by revenue gives it.
- Add rows until every product is in. At least two are needed.
- Read the blended margin, the total gross profit, the plain average of the margins and the table of each product's contribution.
Formula
gross profit = revenue x margin / 100
blended margin = total gross profit / total revenue x 100
points contributed = gross profit / total revenue x 100
Weighting by revenue is what separates the blended margin from the plain average of the margins. The points contributed by all products add up to the blended margin.
Three product lines
Coffee beans bring $12,000 of revenue at a 42% margin, equipment $8,000 at 25%, and accessories $2,500 at 55%. The gross profit is $5,040.00 + $2,000.00 + $1,375.00 = $8,415.00 on $22,500 of revenue, so the blended margin is 8,415 / 22,500 = 37.4%.
The plain average of the three margins is (42 + 25 + 55) / 3 = 40.67%, which overstates the margin by 3.27 points because the highest margin line sells the least. Coffee beans are 53.33% of revenue and contribute 22.4 points. A line with a negative margin, such as a $1,000 line at -10% next to a $1,000 line at 30%, pulls the blend to 10%.
Why not just average the margins
A simple average treats every product as equally important, which is rarely true. A product that brings in most of your revenue should count for more than one that sells a few units. Weighting each margin by its revenue gives the margin you really earn on the whole mix, the same figure you would get by adding up all the profit and dividing by all the revenue.
The gap between the two averages is a useful signal. When the blended margin is lower than the plain average, your high margin lines are small and your low margin lines are large. Shifting the mix toward the high margin lines, even slightly, then lifts the overall margin more than any single price change would.
Using it for planning
Try changing the revenue of one line and watch the blend move. That shows what a change in mix does without any change in prices. You can also use other weights than revenue, such as units or cost, as long as every line uses the same one and the margins match it.
Margin here is gross profit divided by revenue. If you know markups on cost instead, convert them first with the Markup Calculator. The Profit Margin Calculator finds the margin of one product, the Margin of Safety Calculator shows how far sales can fall, and the GMROI Calculator ties margin to inventory.
Assumptions and limits
- Revenue is zero or more in dollars and cents, and the total must be above zero. At least two lines are needed.
- Margins are from -1,000 to 100 percent, with at most three decimals, and are on revenue, not on cost.
- The mix stays as entered. Prices, discounts and costs are not modeled.
- Nothing is stored or uploaded.
Frequently asked questions
How do you calculate a weighted average margin?
Work out the gross profit of each product, add them up, and divide by the total revenue. The three-line example has $8,415 of profit on $22,500 of revenue, which is 37.4%.
Why is the weighted margin different from the simple average?
The simple average ignores how much each product sells. The weighted margin counts a large seller more than a small one, so it reflects what you earn on all sales together.
Can I weight by units instead of revenue?
Yes, if the margins are per unit and you use the same weight for every row. The result is then a unit weighted margin. Revenue weighting is the usual choice for a margin on sales.
What does a negative margin do?
It lowers the blend. Enter it with a minus sign. A product sold at a loss contributes negative gross profit, which the table shows in parentheses.