Was blown away earlier this year that I never really noticed the significant differences between profit margin & markup. And how it affected business when you focus on either.
Definition: Difference between Revenue & Costs expressed in %. Also known as Margin
Formula: ((Revenue – Cost) / Revenue) x 100 = % Profit Margin
If you create a product/service costing $1 & sell for $2, that is a 50% profit margin
If you create a product/service costing %100 & sell for $150, that is a Profit of $50 & a Margin of 33%
Definition: Offer price compared to cost
Formula: ((Price – Cost) / Cost) x 100 = % Markup
If you create a product/service costing $1 & sell for $2, that is a 100% markup but only 50% profit margin
If you create a product/service costing $100 & sell for $150, that is a 50% markup but only 33% profit margin
Which is more Important? Margin or Markup?
Both are important, but arguably margin more so in relation to the rest of your business.
What can you do?
- Educate your sales team on the difference between margin & markup
- Link rewards & commissions to margin & not markup
- By having your sales staff (and your entire business) concentrate on margin % instead of markup %, you gain an additional 2-3% profit!
You may also see the reverse whereby a client uses markup (or discounts) to show clients how much discount the client is getting as markup is always higher then margin.
Do you find more slightly more technical related articles interesting?
How will you apply this concept in your own business?