As the heading suggests, understanding the difference between Markup and Margin calculations is essential for your business.
Markup is the additional amount added to third party costs, to arrive at the total amount charged on to your client. Margin is the difference between the cost and the sale.
So, with this is mind: What is your policy? Do you quote: Markup? Or Margin?
Often these two terms are misunderstood, and the result can be devastating:
50% markup does not equate to a 50% margin!
Understanding this leads us to… Opportunity
If we have inadvertently mixed these terms up, and aim for a 50% markup on external costs instead of 50% margin, then you can see below how serious our mistake might be:
If over the course of a year we outsource $500,000 to external suppliers, and we seek to make a 50% margin, we would be expecting to earn $500,000 profit.
However, if we had said that we charge a 50% markup on external supplies, then we would have only made a $250,000 profit.
A quarter of a million dollars difference – Is $250,000 significant? Compelling enough to review your policy?
It may be a good time to familiarize yourself with the above calculations and the resulting impact they make on your bottom line – review your markup and margin policies.
The aim of applying a markup or making a margin is to charge your client enough to cover the supplier cost PLUS:
- Your time.
- Your administration costs.
- Your intellectual property (IP).
- Your knowledge of the product or service.
- Your technical expertise and know-how
- Time pressure and urgency.
Now is as good a time as any to review your preference of markup or margin and reasons for your decision, and implement a change if advantageous.