Margin and Markup
DIFFERENCE BETWEEN MARGIN AND MARKUP
Margin is the profit expressed as a percentage of the sales value
Profit
------- x 100
Sales
Markup is the profit expressed as a percentage of cost
Profit
------ x 100
Cost
Example:
Sales Margin calculation
400
------ x 100 = 40%
1,000
Markup calculation
400
------ x 100 = 66.66%
600
The markup calculation is also known as the “cost plus” calculation as you take your costs and add a markup or a profit amount to the costs to get your selling price.
EXAMPLE:
A use for Sales margins
If you create a price list for your products and each price has a list price and an expected margin, you know if your cost price changes and your sales price remains fixed your margins are squeezed.
If you are working from a basis that you always need 40% on cost on everything you sell then this is how it might look
But if your costs change and you can not increase your selling price by the same amount to match the cost increase, then your margin will change as in this case from 40% to 34%
SALES REPS AND PRICES, HOW TO MANAGE BOTH
Having a List Price and setting a margin allows you not to have to disclose to your sales reps how much an item costs. You can tell them they must get a minimum sales margin of 20% and you can then control the cost and prevent them from marking up on cost.
When marking up on cost, sales reps have a tendency to forget that the purchase price on a suppliers invoice is not necessarily the true cost of the item. Shipping, Duty and other costs may have to be added on to give you the true cost.
EXAMPLES OF MARGINS AND MARKUPS
Margin is the profit expressed as a percentage of the sales value
Profit
Sales
Markup is the profit expressed as a percentage of cost
Profit
Cost
Example:
| Sales | 1,000 |
| Cost | 600 |
| Profit | 400 |
Sales Margin calculation
400
1,000
Markup calculation
400
600
The markup calculation is also known as the “cost plus” calculation as you take your costs and add a markup or a profit amount to the costs to get your selling price.
EXAMPLE:
A use for Sales margins
If you create a price list for your products and each price has a list price and an expected margin, you know if your cost price changes and your sales price remains fixed your margins are squeezed.
If you are working from a basis that you always need 40% on cost on everything you sell then this is how it might look
| Original cost price | With new cost price | |||
| List Price | 500 | List Price | 500 | |
| Cost Price | 300 | Cost Price | 330 | |
| Profit | 200 | Profit | 170 | |
| Margin | 40% | Margin | 34% |
But if your costs change and you can not increase your selling price by the same amount to match the cost increase, then your margin will change as in this case from 40% to 34%
SALES REPS AND PRICES, HOW TO MANAGE BOTH
Having a List Price and setting a margin allows you not to have to disclose to your sales reps how much an item costs. You can tell them they must get a minimum sales margin of 20% and you can then control the cost and prevent them from marking up on cost.
When marking up on cost, sales reps have a tendency to forget that the purchase price on a suppliers invoice is not necessarily the true cost of the item. Shipping, Duty and other costs may have to be added on to give you the true cost.
EXAMPLES OF MARGINS AND MARKUPS