Margin vs. Markup: Which One Matters More for Your Small Business?
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- เผยแพร่เมื่อ 5 ก.ย. 2024
- Are You Pricing Your Products / Service Wrong? If you are looking at the markup only, you might be costing yourself lots of potential profit! Finding You Aren't Hitting Your Profit Goals? It might be because you aren't aware of what your profit margins are on your products/services.
Too many small business owners confuse markup and margin so you will want to know the difference to ensure you price correctly. Let's take a look at both and the common mistakes I see folks making when looking at markup vs margin.
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New for 2022 - Another Way to Learn About Margin vs Markup - *th-cam.com/video/X89AFodPA3U/w-d-xo.html* - Tammy
I think I know why people (myself included lol) are having problems with this concept, is because when you are saying cost of good, that doesn’t include all the expenses that go into producing the product. People are going into this thinking it does. So for your example, the person who’s cost is 200$ and wins the bid for 400$ is doubling his money and therefore making a 100% profit. When in reality, business owners should look at revenue. They’re cost of good takes a piece of the revenue (think of a pie chart), expenses take a piece of the pie (lease on building, administrative work, etc), and of course the cost of good takes a big piece of the pie. So markup is helpful from an investment perspective where you want to think about how to double your money for example. But margin is helpful when you are looking at all the pieces together, and you need to make decisions for the whole puzzle: should I raise prices or cut costs elsewhere to increase margin.
Tammy Adams thank you for the correction. I understand.
Tammy Adams great video btw!
This was great, I'm just starting and this was exactly what I needed. Fantastic!
Glad it was helpful!
Thanks Tammy! Even though I definitely had to watch this particular video a couple of times, in order unscramble things a bit!LOL! It was definitely well worth the effort of doing so!Thanks!
Yea, I realized later I need to break that one down more and just tackle GM% on its own. It is such a critical number to know and needs its own video! Always appreciate the feedback. Keep me on track. :-)
Thank you very much it was great help in understanding the concept.
Glad it helped! - Tammy :-)
Really helpful video I’m about to start my business and was confused about this but now I got it thank you
Glad it helped! That is awesome about the new business! I have several videos on pricing as well that might help as you get to that part - Good luck on the new business! - Tammy
Thank you it is really clear to use margin%.
Glad it helped! - tammy
You are such a good teacher!
Ah, thanks! Glad it helps! - Tammy
Thanks
Thank you
I just started my store and this was extremely useful information. Thank you so much! New sub here!
Congratulations!! What kind of store? - Tammy
Are You Using Markup or Margin When Pricing Your Products or Services? - Tammy
Excellent! Excellent, video. Thank you. I have subscribed.
Awesome! Glad you found it helpful! - Tammy
Excellent explanation. Thank youuu
Glad you found it helpful! - Tammy
Great video. Thanks
Glad it helped!
Superb explanation
Thank you 🙂 Glad it helps! - Tammy
😊 Took me a few times too. Good video though. I am refreshing my accounting skills and just could not fathom why the percentages cannot tie back to the gross profit amount. In my mind it should come back or tie back to the amount somewhere. I just couldn’t figure it out even though I know that the equations to calculate either are different. Thank you Tammie, although I know the equations are different I understand the difference between the two, not only that they are calculated with different equations
In other words, costs out pace profit.
So, in my elementary/novice thinking here...what should I focus on more - Margin% or Markup%? Granted, every business is different yet which has the greater impact (positive or negative) on Net Profit? Worded differently, should the goal be a higher or lower Margin% vs Markup%? By the way, I'm new to the channel and have learned a lot in the two days since my godson referred me.
Hi there! I'm glad you are finding some good nuggets! You can do either way but I personally like margin since it lines up with the profit and loss the best. Since we know that Sales - COGS - Expenses = Profit, we can start to see the trends with our numbers to know that we need say 50% for our costs, then an additional 20% for our expenses so we can get a 30% profit. But if you "markup" 70% you will not hit those numbers. You can use both as well. Do your initial markup of what you think would be the right price, then run the percentages to see if you hit your gross margin and profit margin. Hope this makes sense. - Tammy Here is a link to the P&L training for beginners just in case this part is new for you: th-cam.com/video/jFgqMVmXbx4/w-d-xo.html
So what is the difference between markup and margin when my cost is known (ie when everything is added up and I get the final total cost of the product)?
If I want a profit of 20% on that cost then its cost*(1+20%). and that will give the sell price that will give the me 20% profit.
So what is the relevance of margin in this case?
Great question. The first thing is, we want to make sure we don't use "Profit". Profit is Sales - COGS - Expenses. You are wanting Gross Profit which is Sales - COGS. I know it is similar but it gets more folks in trouble. For example, if your expenses run 15% of your sales, then your 'real' profit is only 5%. Looking at your question, let's assume your COGS are $50. To get a 20% Profit Margin, we actually work with the other 80%. So take the $50 and divide it by 80% and you get $62.50. So the sales price is $62.50, COGS are $50 leaving $12,50 for GM $ which is 20% ($12.50 / $62.50) . Hope this helps. :-)
@@BadassBusinessOwners thanks for replying but if I already figured out what the product cost is (which includes purchase, rent, storage,etc) then if I add 20% then my profit is 20% right? Margin could be used when I have costs that are not factored in the product cost for example I have the purchase price and I know rent is 1% if my cos, storage is another 2% etc so we add profit % plus this cost % and calculate the margin?
@@hammerjoe2008 So you are adding together your Cost of Goods and your Expenses? Normally we want to keep them separate (Like we do on our Profit & Loss Income Statement) But let's use your example. When you add 20% to the number you are actually only adding a "markup". You are marking it up 20%. So using that $50 example if you multiply it by the 1.20% (to add the 20% to the original cost) you only get $60. So your markup is 20% but the Gross Profit is only 16.6% (the difference of $10 / $60 ). To get a true profit margin you need to use the example I gave above.
@@BadassBusinessOwners that is what confuses me. If i spent $50 to get a product sold and want to make 20% profit. If i sell it for $60 i pocket $10. Thats my profit. Anything else is just accounting names. If i sell it for $62.50 using the margin math my true profit is 25%.
@@hammerjoe2008 I think I know what it is causing the confusion. Everything is a percent of sales. So the sales price is what you divide it by. So if you sell something for $60 and your costs are $50 you have the $10 you made. So now we take the $10 and divided it by the sales made (the $60). So $10/$60 = 16.67%.
Umm... what?
Okay, so why does this matter? Of course margin and markup put the efficiency of your product into perspective, but isn't profit really the only thing that matters?
Profit is absolutely the goal! All the sales in the world mean nothing if none of it makes it to the bottom line!
People who dislike this video are/have gone bankrupt!!
Anyone else got even more confused than they were after watching the video😑....I wish I didn't watch the video,ah😩
Hey Adenike, sorry you feel more confused. Is there a certain aspect that seems confusing? Here is another one that might make it a little easier. Markup vs Margin - The Simple Difference Between Margin and Markup
th-cam.com/video/OZCkBBM4vjM/w-d-xo.html
@@BadassBusinessOwners I truly apologise if my comment was a bit harsh,I think the emphasised explanation threw me out of track,I think it would have been much more understandable if it was precise,i will be sure to check out the video you requested, Thank u
@@adenikebello9158 I didn't take it harsh at all. Just wanted to clarify so I can keep improving the videos. This one was a few years ago and I keep trying to simplify each time. So I LOVE the feedback. Only makes the videos better. :-)
your examples, are confusing. I get what your talking abut, but it seems out of order.
thank you for the feedback. I'll keep. that in mind in future videos. - Tammy
@@BadassBusinessOwners ok, I got it now, but on the $400 Bid. how would you do the math on that one, to get the $500?
@@gordon9177 Hey there. I can see how that was confusing since I didn't explain it. My videos after this I tried to make sure I explained the examples used much better. I was trying to explain that Margin & Markup are calculated differently as Margin is a percentage of sales. The examples later walk you through that. Here is a video I did later and might explain things a little better th-cam.com/video/X89AFodPA3U/w-d-xo.html
@@BadassBusinessOwners Exactly. for e.g. If I bought a item @ $120 and wanted to sell it, how much Margin should I put on it? I understood the later e.g you did, $4 profit, divided by the sales price $10. but how much Margin should you put on a item, that's the trick. Sure, you want your $ back and then some.
@@gordon9177 Each business is different. Some can do a low number and some need a higher number. The best thing to do is try different amounts until you find the one that works for you. For example, if we used your $120 example. Let's say you plan on the following. COGS to run around 40%, expenses around 30% and Net income (initial profit) at the remaining 30%. This means you would take your $120 and divide it by the 40% and that lets you know the price would be $300. So using our calculation. The Sales of $300 would breakdown like this: 40% (the initial $120) for COGS, then 30% ($90) will go towards expenses, leaving the last 30% (also $90) for potential profit. Hope this helps. If you don't have these estimates, you will need to create some and plug them in to find that price that might work. But once you have been in business for a bit, you should have already a basic expenses %. Another example might be thinking 45% COGS. Then you take the $120 and divide it by 45% (.45) for $267. Hope this makes sense.... Tammy
Make ur video short and simple time is important you wasting it too much
I always appreciate feedback. Some are shorter than others. Some folks like more detail and some less so I try and do them both ways. Especially since numbers come easily to some folks and take a little longer for others. I'll keep this in mind. - Tammy
Thank you