Mark-up vs Margin
Are you confused about what the difference is and which one puts more money in your pocket?
Understanding the difference between the two pricing models can have a dramatic effect on your bottom line….and you’d be amazed at how many business owners are a bit unsure about the difference and whether there is a difference at all!
But that’s ok, I come across it frequently – it’s more of a confusion really in the terminology.
So, let me try to clear up the confusion.
What is Mark-up?
Mark-up is the difference between the actual cost and the sell price
What is Margin?
Margin is the difference between the sell price and the profit
When seeking to calculate the optimised profitability on any job some people mistakenly believe that if the service or product is marked up by say 50% the result will be a 50% margin on the income.
The reality is that a 50% mark-up rate actually produces a gross margin percentage of only 33%.
So how do you work out the actual margin? Which is the ONLY number that you should be interested in, in your business.
There’s an easy calculation and it goes like this…
Mark-up divided by sell price x 100
So let’s play that out with the numbers from above to make it easy…
A product costs £100 to make
You sell it for £150
So your Mark-up is £50 (50%)
Margin = £50/£150 x 100
Margin = 33%
(To make a 50% Margin you would need to sell the product at £200)
So you can see now why it’s crucial to your business that you know the difference and more importantly, that your quoting and sales departments understand the difference between mark-up and margin.
You need to make margin – that’s the number to focus on.