Margin is just a fancy word for what you get to keep on a sale, either as profit or to run the rest of your business.
But isn't it the same as markup, heck NO!
Before we dive into this, lets do a quick review of percentages. (If you understand how percentages work, please excuse me for a paragraph or two. If you don’t understand percentages, let me see if I can give you one of the most important light bulb moments you will get in business.)
The word percent, comes from Latin, per centum (think century) or by the hundred. So a percent is simply a number referenced to 100, or how many per 100.
Look at the percent symbol, %, can you see the 100?
So a percentage takes one number and divides (/) it by another number and then multiplies it by 100 to give you a reference to a percentage.
Here are some quick examples…
What is 58 as a percentage of 145?
The calculation is 58 divide by 145 multiply 100 gives 40%.
What is 234 as a percentage of 76?
The calculation is 234 divided by 76 multiplied by 100 gives 307%.
So lets get back to our margin vs markup learning.
Lets say we buy something for $100 and we sell it for $150, in other words we mark up the item by 50%. So we take the 50% of our buy price and add it to our buy price, ie 50% of $100 is $50, so our sale price is $100 + $50 = $150
So the margin we make (get to keep) is $50, however this is not 50%.
The margin percentage is always calculated on the sale price, not the buy price as above for the markup.
So our margin percentage out of our sale price, is $50 out $150 or 33%, which is a lot less than 50%. This is is actually 44% (not 17%) less than what you thought you were getting.
So if you have been going along with a mark up of 50% and thinking you were making the same in margin percentage, you maybe wondering why your profits are down.
See for every $100,000 in sales, instead of making 50% margin or $50,000 you are only making $33,000 dollars. In other words you are down $17,000 on where you thought!
(Best not think to long about how much money you have left on the table up until now).
No wonder you may be scratching your head because you have no money in your bank account.
Do your pricing based on achieving a certain margin that works for your business and not just a markup that you think is right.
Some of you may be thinking, Brad is this the same as the Gross Profit Margin on the profit and loss statement?
The answer is yes, the gross profit margin on your profit and loss represents the sum of all your individual margins on all the product and services you sell.