We see people confusing markup and margin when calculating a sell price. The terms markup and margin today are used interchangeably to mean gross margin but this is a misunderstanding and can have a big impact on your bottom line.
Let's define each term:
How to Calculate a Sell Price Using Markup Percentage
A markup percentage is an item's cost times a markup percentage plus the original item's cost. In a formula that is: Markup % = (Cost x Percentage) + Cost
If an item's cost is $100.00 and you want a 25% markup, the selling price would be $125.00. Using the formula it would read: ($100.00 x 0.25) + $100.00
Another way of performing this calculate is to take your desired markup percentage as a whole number and add a "1." in front of it. If you want a 25% markup then your number would become 1.25. Multiply your item's cost x 1.25 and you'll get the markup price. The formula would be: Cost x 1.25. If your item's cost is $100.00 the formula would be: $100.00 x 1.25 = $125.00.
How to Calculate a Sell Price Using Gross Margin Percentage
Gross margin is the difference between selling price and cost. This difference can be expressed as a percentage of selling price. In a formula it is: Gross Margin % = Cost / (1 - Percentage)
If an item's cost is $100.00 and you want a 25% gross margin, the selling price would be $133.33. Using the formula it would read: $100.00 / (1 - .25)
So What To Use: Markup vs Margin?
Using markup to set selling prices overstates the profitability percentage of the transaction. Calculating selling price in gross margin terms you can compare the profitability of the transaction to the economics of a financial statement. By targeting a gross margin percentage vs the markup percentage you can add an additional 2 to 3 percent profit to your bottom line.
Sales people often think in terms of markup percentage. CFO's, operations, accountants, and other financial professionals think in terms of margin percentage. Train your sales people to use gross margin percentage and your bottom line will be better off.
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