Mark Up Vs. Margin
The retail trade is based on selling products for more than they cost you to produce. Both markup and margin are factors; however, they are different.
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Principle
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The general principle of business is that in order to be profitable, you must sell items (or services) for more than they cost. There may be occasional reasons to sell for less, but ignoring this most basic tenet leads to failure.
Margin
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Very simply, margin is the difference between the cost of your product and your sale price. For example, if you sell an item for $5 that costs you $4 to manufacture, your margin is $1.
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Markup
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On the other hand, markup is the percentage added to the cost of your product in order to reach your sales price. Markup can be calculated on either your cost or your sell price.
Cost vs. Sell
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In looking at the earlier example, the markup calculated on the cost is 25 percent. However, the markup based on the price is 20 percent. While the latter seems to be less, the end result in both examples is a $1 margin. You've made the same amount of money.
Consistency
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The difference is a mathematical inversion. No matter which method you choose, be consistent. Also, use a fixed markup for pricing all of your products. The exception to this might be the occasional sale item or a product you use as a loss leader to generate additional sales of other products.
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References
- Photo Credit Image by Fotolia.com, courtesy of Dmitri MIkitenko
