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Markup or Margin

Selling and Pricing

Introduction

Half the art of selling, is the art of pricing. Know the market and discern the customer.

These are things of intuition and experience, what price is fair for this customer, and what price will the market bear ?

In order to do this efficiently, you need to be confident that the price you're selling for is profitable. Not only that, you must be able to quickly navigate through the forest of supplier discounts, list prices, VAT, and acceptable margins.

Two terms used when discussing prices are markup and margin. They are different ways of calculating profit, and the difference can be confusing.

This article explains the difference between markup and margin, and equips you to easily calculate prices and profits in whatever situation you find yourself.

Percentages

Many retail establishments do their calculations based on markups. This is not the same thing as margin. This is often a source of confusion - but only because percentages are difficult until you understand them.

Margin
The percentage margin is the percentage of the final selling price that is profit.
Markup
A markup is what percentage of the cost price do you add on to get the selling price.

These are different, a selling price with a margin of 25% results in more profit than a selling price with a markup of 25%.

In a merchant situation it is probably better to work with margins. This means you can know what percentage of our total income is profit.

Note

Obviously profits calculated in this way are gross profits.

Your overheads (like rates, fixed costs, corporation tax, wages, etc) still need to be taken off before you can know your nett profit.

This is why you'll need to establish policies with minimum acceptable margins.

With margins, a 50% margin means that half the selling price is profit. In markups, that is a 100% markup (you have added 100% of the cost price to make the selling price). With margins, a 100% margin is only possible if the cost price is zero.

To understand why margins are higher, imagine an item that costs fifty pounds. If you sell it with a margin of 50% - that means fifty percent of the selling price should be profit. If you sell it at 100 pounds, half the selling price is profit - margin 50%.

If you sell the same item (cost fifty pounds) with a markup of fifty percent, you add fifty percent of the cost price. Fifty percent of the cost price is twenty-five pounds. This makes the total selling price seventy-five pounds.

A fifty percent margin is higher than a fifty percent markup.

How to Calculate Margins

You will often have to calculate margins. Either to work out a selling price from a cost price, or to work out what margin a certain selling price would result in.

Selling Price from Cost Price

The full formula for working out a selling price from a cost price and a certain margin is :

selling = cost/((100-margin)/100)

Thankfully there is a quicker way to work it out.

For a five percent margin, divide the cost price by 0.95.
For a ten percent margin, divide the cost price by 0.9.
For a fifteen percent margin, divide the cost price by 0.85.
For a twenty percent margin, divide the cost price by 0.8.
For a twenty-five percent margin, divide the cost price by 0.75.
For a thirty percent margin, divide the cost price by 0.7.

Hopefully you can see the pattern.

Margin from Cost and Selling Prices

Sometimes you will have a cost and selling price, and need to know what margin that results in. The formula is :

margin = (1 - (cost/selling))x100

You can work it back from the examples given in Selling Price from Cost Price.

If cost/selling is 0.95, the margin is five percent.
If cost/selling is 0.9, the margin is ten percent.
If cost/selling is 0.85, the margin is fifteen percent.
If cost/selling is 0.8, the margin is twenty percent.

etc...

Discounts from List Price

Many suppliers prefer to quote list prices less a discount. In these circumstances it is useful to be able to quote customers a discount off list. They love the idea that they are getting a discount.

To work out the nett. cost price (what we pay) from a list less discount, use the following formula :

cost = list * ((100 - discount)/100)

Working out what discount to quote customers, whilst still maintaining an acceptable margin, can be fiddly.

You can work it out as follows. final discount is the discount to offer the customer, supplier discount is the percentage off list price you have been offered, list is the list price and margin is the margin you want to make as a percentage.

cost = list * ((100 - supplier discount)/100)
selling = cost/((100-margin)/100)
final discount = (1 - selling/list) * 100

It can actually be easier to guess a few times though. Work out the cost price. Then work out the selling price if you offer (for example) forty percent off list - and see what margin that leaves you with. If it is too little, try reducing the discount you offer - or vice versa.

VAT

It is normal for trade outlets quote prices exclusive of VAT.

To add VAT to a price, multiply by 1.175.

If you have a price including VAT and need to work out the ex-VAT price, divide by 1.175.

There are one or two items which should be sold without VAT (like safety boots). These ought to be saleable with a zero VAT rate - sometimes your point of sale system will mean that's not possible. If a customer picks up on this, you are probably obliged to sell without charging them VAT.

Exports

You may have the situation where customers are buying the goods for export, and you are shipping the goods to the docks (or even arranging delivery abroad).

In these circumstances it is possible that VAT is not chargeable. This is also complicated - and you need to check with customs for the correct procedure.

Also see: Partner Directory.