Getting these 2 numbers mixed up is one sure way to put yourself out of business very quickly!
Adam Fox • 28 June 2021
Do you know your Mark up from your margin?
For anybody who has been in business for any length of time, you will know that the secret to being successful is knowing your numbers.
2 numbers I often hear people refer to as being the same thing are margin and mark-up.
Most businesses in the fields of construction and trades tend to use mark-up when setting their price strategy. They take the cost of the goods they are providing, materials, labour equipment etc and they add a percentage mark-up. Great, not a bad way to price your jobs and it’s easy to raise or lower your prices across the board should you need to.
This mark-up is not however the same as your gross margin.
These numbers are very different.
I’m going to run through an example to show you the difference.
Lest start with the easy one, your mark-up.
For ease of doing the maths. Let’s say the cost to you of doing a job is £100
Now to achieve a mark-up of 50%
£100 x (1 + 50%) - you would need to charge your client £150. Easy right.
Now let’s imagine that actually, in order to make a good profit for your business, you need to achieve a 50% gross margin.
The amount you need to charge your client is very different!
Here’s why.
The calculation to work out your Gross Margin is:
Gross Margin = (Price – Cost of Goods) / Price
So if we take the numbers from before and plug them into this equation, we get:
Gross Margin = (£150 - £100) / £150
Your Gross Margin is just 33%. Pretty devastating if you need to achieve a 50% margin to make a profit!
So, if you need to achieve a 50% Gross Margin, how much should you be charging?
Let’s rearrange the equation and see shall we?
Price = Cost of Goods / (1 – Gross Margin%)
Price = £100 / (1 – 50%)
Your sale price should in fact be £200, not £150
You can see why not understanding the difference between these 2 numbers can be so devastating for business owners.
This might seem complicated, but it’s really not.
Take the time to learn your numbers and see the difference it makes to your decision making and the ultimate success of your business.
If you’d like some help getting to grips with your key numbers give me a shout. You’ll be amazed how quickly your profit margin will increase once you start to understand them.
Until next time.
Bye for now!
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