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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.

{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:

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 | Zadok Master Jewelers

Stick to the Program — And Watch Your Sales Grow

When Zadok Master Jewelers in Houston, Texas, decided to move to a new location (they’d been in the same one for the 45 years they’d been in business), they called Wilkerson to run a moving sale. The results, says seventh-generation jeweler Jonathan Zadok, were “off the charts” in terms of traffic and sales. Why? They took Wilkerson’s advice and stuck to the company’s marketing program, which included sign twirlers — something Jonathan Zadok had never used before. He says a number of very wealthy customers came in because of them. “They said, ‘I loved your sign twirlers and here’s my credit card for $20,000.’ There’s no way we could have done that on our own,” says Zadok. “Without Wilkerson, the sale never, ever would have come close to what it did.”

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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 | Zadok Master Jewelers

Stick to the Program — And Watch Your Sales Grow

When Zadok Master Jewelers in Houston, Texas, decided to move to a new location (they’d been in the same one for the 45 years they’d been in business), they called Wilkerson to run a moving sale. The results, says seventh-generation jeweler Jonathan Zadok, were “off the charts” in terms of traffic and sales. Why? They took Wilkerson’s advice and stuck to the company’s marketing program, which included sign twirlers — something Jonathan Zadok had never used before. He says a number of very wealthy customers came in because of them. “They said, ‘I loved your sign twirlers and here’s my credit card for $20,000.’ There’s no way we could have done that on our own,” says Zadok. “Without Wilkerson, the sale never, ever would have come close to what it did.”

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Most Popular