Is there a difference between margin and markup. Absolutely. Your gross profit for instance is a margin. Simply said, cost subtracted from sales = G.P.
So lets start with Margin. You have an item that cost $2.00 per lb. and you want to achieve a 20% margin on it. Therefore ($2.00 x 20% =.40 cents mark up.) Therefor your selling price for this item will be $2.40. Lets prove that. We prove that by dividing .40 cents by the selling price of $2.40= 16.7%. Oh boy what happened? We lost 3.4% margin! You did not hit your targeted margin percentage of 20%! That is why you must know the differences between margin and markup. Margin is simply a percentage goal, the mark-up is what goes in the bank.
More and more in todays business environment these terms are being used interchangeably to mean gross margin. This lack of understanding could have a negative impact on your bottom line. The reasons are that when you us a percentage margin over cost you are not taking into consideration any selling shrink that can impact the profitability of that item. I am using the word shrink as a profit drain. Here are a few examples of the shrinks; ( damage packages, possibly pilferage, possible removal because of short code dates etc). So you need a cushion so to speak to help cover some of these potential loses. Lets take the same example as above but using a margin percentage over selling price instead of cost we will get a totally different result.
$2.00 cost, you want to make a margin of 20% but instead of multiplying the cost of $2.00 by .20 percent to achieve a .40 cents per pound mark up simply divide your $2.00 cost by 80% (20% subtracted from 100% = 80%) now your selling price goes up to $2.50 per pound and your markup becomes .50 cents per lb. That additional .10 cents per pound helps to cover some of the shrink or selling expenses.
Lets take a higher priced item .
Item cost $4.00 per pound using the same margin of .20% our profit over cost is ($4.00 x .20% =.80 cents per pound mark up) so your selling price will be $4.80 per pound. Now lets apply the margin over selling price.
$4.00 divided by 80% = $5.00 selling price and the markup becomes $1.00 per pound. This gives you .20 cents per pound cushion.
Now just imagine all of the packaged items you sell in your meat departments, and the impact it could have if a manager or store owner dosent understand the difference between margin and markup.
If you have any additional questions just email me.
