Markup - Margin - which to use

Tidyweb

I have started a manufacturing business which also sell retail items. I know my cost of manufacture and my cost of retail goods.

If I am working out what to sell items for should I start with a % margin or % markup.

ie Should I take my manufacture costs and add a mark up or should I take a selling price and ensure I get a specific margin.

Or does it matter, or can I use both one for manufacture and one for retail or should I never mix.

I would be grateful if anyone has any ideas.

hivizman

Mark-up and Margin are mathematically related. Very simply,

Margin = Mark-up/(1 + Mark-up)

For example, if the Mark-up is 25% (that is, 0.25), the Margin is:

0.25/1.25 = 0.20 = 20%

If you have some goods costing 80, and apply a 25% mark-up, then the mark-up will be 20 and the selling price will be 100. Margin is equal to (Sales - Cost of Sales)/Sales, which in this case is (100 - 80)/100 = 20/100 = 20%.

As you already know your cost, and need to work out your selling price, it's easier for you to work with a mark-up, but if you are aiming for a particular gross profit margin, then you need to convert the margin into the corresponding mark-up before working out your selling prices.

Tidyweb

Thanks, but I now how to work each of them out.

My question is, which should you use markup or margin when deciding on a selling price.

Which is accpeted as the best approach and the benifits of doing it that way or the negative of doing it the other way,.

hivizman

It doesn't matter which you use, so long as you remember that a particular percentage will give you a different selling price if you use it as a mark-up or as a margin.

For example if you use a 50% mark-up and your cost is 100, then your selling price will be 150. But if you are aiming for a 50% margin and your cost is 100, then your selling price will be 200.

Your gross profit - the difference between sales revenue and cost of sales - needs to be large enough to cover your overhead expenses and provide you with your net profit from your business.

One thing that you need to think about is the nature of the markets where you are selling your goods. If you are operating in a competitive market, then you will not have much flexibility over what price you charge - you will have to charge more or less the same as your competitors or you won't get any business. In this situation, where your selling price is basically determined by the market, not by yourself, a lot of businesses operate in terms of looking at the gross profit margin. Is the profit margin enough to cover overheads and leave you with a satisfactory net profit?

But if you have flexibility over setting your selling price, then many businesses calculate the selling price by marking-up the cost price by enough to cover overheads and leave a satisfactory net profit.

It's fine to use mark-up for setting the selling price of some goods and margin for other goods, whichever is more convenient for the items in question. Usually, though, margin implies that you already know what the selling price has to be.