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Mark-up or Margin, what is the difference?

"I need 25% margin to be profitable" you say. "So why don't you price to achieve that margin?" I ask. "Your 25% mark-up is actually a 20% margin!" It usually takes half an hour plus a calculator and several scraps of paper before they agree that they are pricing their product/service 5% lower than they intended.

 

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Small Business Senior Manager Training

Your Key to SuccessSuccess

Mark-up or Margin, what is the difference.

 Almost every contractor I worked with over the last few years, and there have been many, used a mark-up formula in their pricing. In most cases it was something like $55 per hour for labor, plus materials marked up 25%. (We will talk about the labor charge later because it is more complicated)

 “I need 25% margin to be profitable” they say. “So why don’t you price to achieve that margin?” I ask. “Your 25% mark-up is actually a 20% margin!” It usually takes half an hour plus a calculator and several scraps of paper before they agree that they are pricing their product/service 5% lower than they intended.

You can try it yourself, remembering that the formula for margin is:

Gross Margin %    =   (Selling Price – Cost)/Selling Price all *100.

 but to save a little time, here is a table:

                         Mark-up %                  Mark-up Factor           Margin %

                           10.00%                                 1.10                    9.09%

                           15.00%                                 1.15                 13.04%

                           20.00%                                 1.20                 16.66%

                           25.00%                                 1.25                 20.00%

   33.33%                                 1.33                 25.00%

                           40.00%                                 1.40                 28.57%

                           50.00%                                 1.50                 33.33%

 As you can see, the margin mark-up disparity increases as the mark-up increases. So remember, to get your 25% margin, you need to mark-up by 33.33%. By doing that you increase you profit by 5%.  For the mathematically minded, it is interesting to rework the formula for gross margin in terms of mark up factor, and you get:

Gross Margin %    =   Markup %/Markup Factor.

This rework clearly shows that the resulting gross margin percent must always be less than the markup %..

OK, so what is the point? The point is that the difference can turn a profit into a loss. Let us assume your overheads are running at 25% of sales. If you want to make a profit of 5% on sales you must have a margin of 30%. That is a mathematical requirement. If you interpret this to mean a markup of 30% your margin is only 23%, so instead of making 5% profit you are losing 2%.

When you read this it all seems so obvious, but think seriously about the implications. In the example used above, the difference between using a margin of 30% and a mark-up of 30% is 7%, and that 7% is out of your pocket. The numbers I use in the example are taken from an actual client. He worked his heart out for years, keeping his head above water by taking a low salary and working long hours (Sound familiar!). A little training in the management skills required to be a small business CEO gave him his life back.

(Just for interest, some of you may want a formula for finding the markup factor for a specific gross margin. That is quite simple - it is:

Mark up factor = 1/Gross Margin % all *100.)

In a later article we will talk about the labor element, but suffice to say here, that is one of the most incorrectly calculated elements of pricing by a majority of contractors.

A more detailed  table!

 Mark-up % Mark-up Factor Margin %
1.0% 1.01 0.99%
2.0% 1.02 1.96%
3.0% 1.03 2.91%
4.0% 1.04 3.85%
5.0% 1.05 4.76%
6.0% 1.06 5.66%
7.0% 1.07 6.54%
8.0% 1.08 7.41%
9.0% 1.09 8.26%
10.0% 1.10 9.09%
11.0% 1.11 9.91%
12.0% 1.12 10.71%
13.0% 1.13 11.50%
14.0% 1.14 12.28%
15.0% 1.15 13.04%
16.0% 1.16 13.79%
17.0% 1.17 14.53%
18.0% 1.18 15.25%
19.0% 1.19 15.97%
20.0% 1.20 16.67%
21.0% 1.21 17.36%
22.0% 1.22 18.03%
23.0% 1.23 18.70%
24.0% 1.24 19.35%
25.0% 1.25 20.00%
26.0% 1.26 20.63%
27.0% 1.27 21.26%
28.0% 1.28 21.88%
29.0% 1.29 22.48%
30.0% 1.30 23.08%
31.0% 1.31 23.66%
32.0% 1.32 24.24%
33.0% 1.33 24.81%
34.0% 1.34 25.37%
35.0% 1.35 25.93%
36.0% 1.36 26.47%
37.0% 1.37 27.01%
38.0% 1.38 27.54%
39.0% 1.39 28.06%
40.0% 1.40 28.57%
41.0% 1.41 29.08%
42.0% 1.42 29.58%
43.0% 1.43 30.07%
44.0% 1.44 30.56%
45.0% 1.45 31.03%
46.0% 1.46 31.51%
47.0% 1.47 31.97%
48.0% 1.48 32.43%
49.0% 1.49 32.89%
50.0% 1.50 33.33%
51.0% 1.51 33.77%
52.0% 1.52 34.21%
53.0% 1.53 34.64%
54.0% 1.54 35.06%
55.0% 1.55 35.48%
56.0% 1.56 35.90%
57.0% 1.57 36.31%
58.0% 1.58 36.71%
59.0% 1.59 37.11%
60.0% 1.60 37.50%
61.0% 1.61 37.89%
62.0% 1.62 38.27%
63.0% 1.63 38.65%
64.0% 1.64 39.02%
65.0% 1.65 39.39%
66.0% 1.66 39.76%
67.0% 1.67 40.12%
68.0% 1.68 40.48%
69.0% 1.69 40.83%
70.0% 1.70 41.18%
71.0% 1.71 41.52%
72.0% 1.72 41.86%
73.0% 1.73 42.20%
74.0% 1.74 42.53%
75.0% 1.75 42.86%

To download the table click here!

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The Author After 25 years consulting to small and medium sized companies, Mike Anderson, principal of Train Me To Be a CEO realized that the most important part of his work was training the CEO, and the reason he was such a good consultant was that he did that very well.

Trained as an engineer, he became a CEO of a midsize corporation at the age of 35. After a spell at Harvard Business School he entered the world of consulting.

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