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Mark up vs Margin

Hamish Pryde • July 8, 2013

Mark-up versus Margin - What is the Difference? 

Is there a difference ???   Damn right there is !!!  

So, which is the most important one ???    It is the margin !!!

More and more I hear these two terms are being used interchangeably to mean gross margin, but that misunderstanding is likely to be to the detriment of the bottom line.

Mark-up and Gross Margin are not the same!  A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line.  Speaking in terminology, mark-up percentage is the percentage difference between the actual cost and the selling price, while gross    margin percentage is the percentage difference between the selling price and the gross profit.

Where should my focus be to optimise profitability?  Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement.  However, a 25% mark-up rate produces a gross margin percentage of only 20%.

How to Calculate Mark-up Percentage

By definition, the mark-up percentage calculations is cost X mark-up percentage, and then add that to  the original unit cost to arrive at the sales price.

 

For example, if a product costs $100, the selling price with a 25% mark-up would be $125.

Gross Profit Margin     =  Sales Price - Unit Cost =  $125 - $100 =  $25.

Markup Percentage    =  Gross Profit Margin / Unit Cost =  $25 / $100 =  25%.

Sales Price                  =  Cost X Mark-up Percentage + Co =  $100 X 25% + $100 =  $125.

 

How to Calculate Gross Margin Percentage

Gross margin defined is Gross Profit/Sales Price. In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage    =  Gross Profit / Sales Price =  $25 / $125 =  20%.

Not quite the "margin percentage" we were looking for.  So, how do we determine the selling price given a desired gross margin?  It is all in the inverse of the gross margin formula, that is:  

By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, the selling price would be $133.33 and the mark-up rate would be 33.3%:

Markup Percentage     =  (Sales Price - Unit Cost) / Unit Cost = ($133.33 - $100) / $100  =  33.3%

 

Focus Where ???

Therefore we need to focus on our gross margins, that are required to cover our overheads and   generate a profit at the bottom line.  The mark-up is simply the tool used to work out the required selling price.

Do you know your mark-up and selling price of the goods you sell?  

If you do not, then you are driving with a blindfold and will crash!!!  

Work out your margin and mark-up using the formulas above and if the result is unexpected, you have the tools to make a change.

 

By Hamish Pryde September 11, 2024
Paper is everywhere. We spend a lot of time and money moving paperwork around. But with today’s technology it is now possible to get rid of paper entirely. Digital documents are simpler, easier to store and send, more searchable and permanent. How long does it take to post a document to somebody via the ole stamp and envelope method, that is snail mail? It is more efficient and timelier to email the document. How many times do you go to print a document at home and find that your printer has run out of ink? Why do we still hold onto printing paper documents? Sometimes it’s just because that’s what we’ve always done and let’s face it change can be difficult at first. Paper alone is cheap. But when you start paying for printers, toner, servicing and maintenance, paper starts to look more expensive. Let alone the storage cost. Paper tax records for seven years can be quite a few boxes of paper. We have embraced some paperless technology as part of a modern business practice. This includes digital signatures, digital collaboration, paperless minutes of business improvement and coaching meetings, electronic work papers and my new digital notebook which I am enjoying. We send questionnaires via email to you to gather vital information to enable us to prepare your annual financial statements. This is a PDF document. Instead of printing the questionnaires you could save the document down into a folder of your choice then edit the PDF document and return to us. How do you edit a PDF document you ask? Once you have opened the document the Adobe online editor lets you do some things for free. The online editor works in any web browser and lets you add text, sticky notes and highlights. Click on the fill & sign button to the right of the document, then in the top toolbar click Iab text button. You can add text directly on the PDF document. Have a try next time you have a PDF document open. Xero and Farm Focus users can attach invoices directly to the transaction loaded into Xero. Then if you are looking at the rates expense in the profit and loss account or farm working account, you can drill down into the rates code and see the transactions. Then attached to each transaction is the rates invoice if you use this great functionality. All invoices can now be stored in the cloud. So why paperless? Productivity - electronic documents are instantly and simultaneously available to everyone who needs them. Reduce waiting times with less risk of loss or damage. Cost savings - you will save money on printing, postage and associated costs. You could pay less rent because you won’t need all that space for your files. Security - electronic documents are more secure than printed ones. Digital records can be password protected and rendered unreadable through encryption. Printed documents are only as secure as their proximity to a copy machine. Reduced Clutter - paperwork on desks and shelves are not only untidy it’s inefficient too. The organisation of digital files is simpler and your office will look much neater. That will help you clear your mind to focus on your business. Environmentally friendly - less printing means fewer trees cut down for pulp and less energy used to make and transport paper. Disaster recovery - if there is a fire or flood, recovery from the backup is much easier with digital storage them with paper. There are great help articles available in Xero or Farm Focus if you are not attaching invoices to payments already. To find out how click on the links below: If you would like to explore ways you can go paperless we can help.
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