Difference between mark-up and margin
Do you really know the difference between mark-up and margin? Do you also understand the impact of discounting? Our experience tells us that many business people get them confused and the consequences of getting them wrong can be profound!
We recently did a presentation for the Bisnet Breakfast Group in Ballarat where we covered issues including mark-up and margin along with the impact of discounting.
To assist everyone in their understanding of the difference, we’ll use the following example:
-if we buy a product from one of our suppliers at $100 and we sell it to our customers for $130, we have a mark-up of 30% ($30 above cost) whereas we have a margin of 23% ($30 profit divided by $130 sell price).
Many people believe that in the above scenario, their margin is 30%. To get a 30% margin, you’d need to sell the product for $143 ($43 profit divided by $143 sale price). The difference is $12 in the sell price of the unit and makes a massive difference to your bottom line (especially is you’re selling a few thousand of them every year)!
You need to remember that your margin (what’s left after you’ve paid for your stock) pays the other operating expenses of your business (phones, rent, staff, vehicles etc) and what’s left after this is profit.
You are in business to make a profit – if you’re not, then you need to consider why you are in business. The profit has come from the margin you make on your sales. If you then discount your prices, you’re directly reducing your profit.
What a number of business people don’t realise is the impact on profit of discounting. Let’s say you have a business which operates on a gross margin of 30% and you offer a 10% discount on your products to your customers in the hope that you’ll move more stock. The impact of this is that you would need to sell 50% more items to stay exactly where you are! To put it in other words, you would need to sell half as much again of what you’re selling to stay in the same place.
It gets really scary when you work on a 30% margin and you offer a 15% discount – in this situation, you’d need to sell 100% more product (that’s twice what you’re currently selling) to stay where you are.
So, do you understand the difference and the impact it can have on your business and especially your profit? If you’re not sure or would like some assistance in getting more scientific about your pricing and margins, please give us a call – you can’t afford not to.