Question of the day - What would you rather earn: a 20% margin or a 25% markup?
Let’s assume you sold a promotional item with a $40 cost for $50 and a $10 profit.
This is a 20% gross margin ($10 profit / $50 price = 20%). For margin, remember “IN”. The margIN is the profit IN the sales price.
Coincidentally, this example equals a 25% markup too. To calculate markup, you mark “UP” the cost. $40 cost + 25% markUP equals $10 profit ($40 x 25% = $10). This is also called “cost plus” pricing.
So, remember IN comes down from sales price to gross margIN, and UP adds up from cost to compute the markUP.
Let’s test it; what would you rather earn: a 20% margin or a 20% markup? (Answer in your mind before proceeding.)
Solution – You sell a promotional item with a $4.00 cost for $5.00 and a $1.00 profit. This is a 20% gross margin ($1 profit / $5 price = 20%). A 20% markup would be the $4.00 cost x 20% markup = 80 cents for a sell price of $4.80. So, a 20% margin is $1.00 profit and a 20% markup is $.80 profit.
So, you get more profit with margIN. Hope you "numbers people" out there enjoyed this one!
Source: Will May
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