Mark up vs. margin

The terms markup and margin are often mistakenly used interchangeably, though they are quite different. Getting this right makes a big difference in the profitability in your business.

Markup is percentage amount added to the cost price to arrive at the selling price. Margin is the amount of gross profit made on the selling price, expressed as a percentage.

For example, if the cost price on an item is $100, with a 50% mark up, the sales price is $150 ($100 x 1.50 = $150)

The gross profit on the item is $50 (150-100) and to get the gross margin take your $50 gross profit and divided by $150 sale press, expressed as a percent (50/150 = 33%)

Gross profit is always expressed in Dollars.  Gross margin is always expressed as a Percentage.

Imagine the scenario of a women’s wear shop that buys a dress for $100, marks it up 50% and puts it on the sales rack for $150. A month goes by and the dress doesn’t sell.  To get rid of the dress, the shop owner decides to discount it by 50% – “hey we marked it up by 50%, so let’s discount it by 50%, get rid of it, and break-even!”  Makes sense, right?

NO!   50% discount on $150 is $75 ($150 x .5 = $75), and the owner bought the dress for $100!  A $25 loss!

Just suppose he did that for a whole rack of dresses – a $25 loss on each one!

All because this shop owner didn’t understand the difference between mark-up and margin!

It’s critical you understand and get this right!  It could be the difference between making a profit, and going out of business.

If you would like further information or you have any questions about this blog give me a call at 305-899-9963 or email me at [email protected] and we’ll make it happen.

Coach John
“Living beyond the ordinary”

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