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Laurie Owen: Don’t Confuse Markup and Profit Margin

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It’s all too easy to arrive at an incorrect selling price when you confuse the two terms.

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[h3]Don’t Confuse Markup and Profit Margin[/h3]

[dropcap cap=T]here are many jewelers who believe markup and margin are the same thing — and sometimes they are. But generally they’re not. The issue is how to arrive at a target selling price when you know the cost. The important concern here is the amount of gross profit dollars contributed from sales to cover general overhead.[/dropcap]

Here’s a simple example to illustrate the point:

Item selling price: $ 1.50
Item cost: $ 1.00

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Does this price-cost relationship represent 50-percent markup or 33-percent markup?

Regardless of your answer, we can safely say that this example represents a gross profit margin of 33 percent.

The real question is: What markup does this represent? Or, stated another way, how much do you have to mark up a product over cost to produce a 33.3 percent gross profit margin? The answer here depends on how you define markup.

Here are the two possible definitions:

Definition A (the common definition):
Mark-Up = Selling Price – Cost
Cost = 1.50 – 1.00 = 50%
1.00

Definition B (as defined by retailers):
Markup = Selling Price – Cost
Selling Price = 1.50 – 1.00 = 33.3%
1.50

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It’s important to note that either definition of markup leads to a 33.3-percent gross profit margin. Using the more conventional definition, it requires a 50-percent markup to produce a 33.3-percent gross profit margin, but retailers would say it requires a 33.3-percent markup. In other words, markup and margin are the same thing when using the retail definition.

We believe that confusion — and errors! — arise when you hear someone say the markup and the margin are the same (Definition B), then conclude that you simply multiply the cost by the markup (Definition A) to get the margin.

 


 

Laurie Owen is senior vice president at Business Resource Services. Contact her at [email protected].

[span class=note]This story is from the November 2008 edition of INSTORE[/span]

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Wilkerson Testimonials

If It’s Time to Consolidate, It’s Time to Call Wilkerson

When Tom Moses decided to close one of the two Moses Jewelers stores in western Pennsylvania, it was time to call in the experts. After reviewing two candidates, Moses, a co-owner of the 72 year-old business, decided to go with Wilkerson. The sale went better than expected. Concerned about running it during the pandemic, Moses says it might have helped the sale. “People wanted to get out, so there was pent-up demand,” he says. “Folks were not traveling so there was disposable income, and we don’t recall a single client commenting to us, feeling uncomfortable. It was busy in here!” And perhaps most importantly, Wilkerson was easy to deal with, he says, and Susan, their personal Wilkerson consultant, was knowledgeable, organized and “really good.” Now, the company can focus on their remaining location — without the hassle of carrying over merchandise that either wouldn’t fit or hadn’t sold. “The decision to hire Wilkerson was a good one,” says Moses.

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Laurie Owen: Don’t Confuse Markup and Profit Margin

mm

Published

on

It’s all too easy to arrive at an incorrect selling price when you confuse the two terms.

{loadposition laurieowenheader}

[h3]Don’t Confuse Markup and Profit Margin[/h3]

[dropcap cap=T]here are many jewelers who believe markup and margin are the same thing — and sometimes they are. But generally they’re not. The issue is how to arrive at a target selling price when you know the cost. The important concern here is the amount of gross profit dollars contributed from sales to cover general overhead.[/dropcap]

Here’s a simple example to illustrate the point:

Advertisement

Item selling price: $ 1.50
Item cost: $ 1.00

Does this price-cost relationship represent 50-percent markup or 33-percent markup?

Regardless of your answer, we can safely say that this example represents a gross profit margin of 33 percent.

The real question is: What markup does this represent? Or, stated another way, how much do you have to mark up a product over cost to produce a 33.3 percent gross profit margin? The answer here depends on how you define markup.

Here are the two possible definitions:

Definition A (the common definition):
Mark-Up = Selling Price – Cost
Cost = 1.50 – 1.00 = 50%
1.00

Advertisement

Definition B (as defined by retailers):
Markup = Selling Price – Cost
Selling Price = 1.50 – 1.00 = 33.3%
1.50

It’s important to note that either definition of markup leads to a 33.3-percent gross profit margin. Using the more conventional definition, it requires a 50-percent markup to produce a 33.3-percent gross profit margin, but retailers would say it requires a 33.3-percent markup. In other words, markup and margin are the same thing when using the retail definition.

We believe that confusion — and errors! — arise when you hear someone say the markup and the margin are the same (Definition B), then conclude that you simply multiply the cost by the markup (Definition A) to get the margin.

 


 

Laurie Owen is senior vice president at Business Resource Services. Contact her at [email protected].

Advertisement

[span class=note]This story is from the November 2008 edition of INSTORE[/span]

Advertisement

SPONSORED VIDEO

Wilkerson Testimonials

If It’s Time to Consolidate, It’s Time to Call Wilkerson

When Tom Moses decided to close one of the two Moses Jewelers stores in western Pennsylvania, it was time to call in the experts. After reviewing two candidates, Moses, a co-owner of the 72 year-old business, decided to go with Wilkerson. The sale went better than expected. Concerned about running it during the pandemic, Moses says it might have helped the sale. “People wanted to get out, so there was pent-up demand,” he says. “Folks were not traveling so there was disposable income, and we don’t recall a single client commenting to us, feeling uncomfortable. It was busy in here!” And perhaps most importantly, Wilkerson was easy to deal with, he says, and Susan, their personal Wilkerson consultant, was knowledgeable, organized and “really good.” Now, the company can focus on their remaining location — without the hassle of carrying over merchandise that either wouldn’t fit or hadn’t sold. “The decision to hire Wilkerson was a good one,” says Moses.

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Most Popular