Markups vs margins: Do you know the difference?

Knowing the difference between markups and margin calculations is essential for your business and ultimately, your bottom line.

When it comes to understanding the difference between markups and margins, the first thing you need to know is this: markup is based on cost, while margin is based on revenue:

• Markup is the 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 what should your policy be? Should you quote markup? Or margin?

Getting these wrong can be devastating for your business because there is a huge difference between, for instance, 50 per cent markup compared to a 50 per cent margin. Let’s look at that difference:

Calculating the sell price using margin

To illustrate the difference between these two tricky calculations, let’s say that you have an external cost of $1,000 and your policy is to achieve a 50% gross margin.

Your calculation will be: Divide the $1,000 cost by 0.5 = $2,000 sell price.

Calculating the sell price using markup

If, however, your business has a markup policy of 50 per cent on external costs, then you would sell the $1,000 item for $1,500 instead of the $2,000 calculated above.

Your calculation will be: $1,000 x 1.5 = $1,500 sell price.

Let’s put these calculations into a real life example:

You’ve accepted a quotation from your print supplier for $10,000. Now you need to ascertain the sell price to your client, either by adding a markup to the supplier cost, or calculating your margin expectation.

Markup:

If you apply a 30% markup, your calculation will be:

$10,000 x 1.3 = $13,000.00 sell price.

The gross profit you would earn is $3,000 ($13,000 sell price, less the $10,000 supplier cost)

Margin:

If you seek to make a 30% margin, your calculation will be:

$10,000 ÷ (1 – 0.3)

$10,000 ÷ 0.7 = $14,285.71 sell price.

The gross profit you would earn is $4,285.71 ($14,285.71 sell price, less the $10,000 supplier cost)

Applying the margin policy would mean that you earn $1,285.71 more than if you implemented a markup policy.

So which should you use? Markups or margins?

Markups and margins are often based on industry norms, what the market will bear, and also take into consideration if you add extra value to the product or service.

It is reasonable to implement different levels of markup or margin for different products or services, for example:

• A 10% markup for basic services such as administration supplies (photocopying, stationery etc.).
• 20% markup if the job is slightly more involved.
• 30% markup where your IP, expertise and technical skills are required.

Common things you’d add margin to are items you are purchasing from a wholesaler and then on-selling.

Ultimately however, the aim of applying a markup or making a margin is to ensure you’re charging your client/customer enough to cover any supplier costs 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

So, there’s no need to be shy; just pick one method and be confident as to how much you are charging and why.

Double-check your business terms and conditions contracts and agreements to ensure that you have formally communicated your policy to your client, and that the markup or margin policy you choose ensures you’re able to run a profitable business.

This article was originally published in May 2015.

Join the soloist movement. Whether you are new to Flying Solo or looking to grow your business, our membership options will help you attract more leads, grow your network and sharpen your business skills.  Sign up to our newsletter to get the latest news and advice straight to your inbox.