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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

Retirement Made Easy with Wilkerson

The store was a landmark in Topeka, Kansas, but after 80 years in business, it was time for Briman’s Leading Jewelers to close up shop. Third generation jeweler and owner Rob Briman says the decision wasn’t easy, but the sale that followed was — all thanks to Wilkerson. Briman had decided a year prior to the summer 2020 sale that he wanted to retire. With a pandemic in full force, he had plenty of questions and concerns. “We had no real way to know if we were going to be successful or have a failure on our hands,” says Briman. “We didn’t know what to expect.” But with Wilkerson in charge, the experience was “fantastic” and now there’s plenty of time for relaxing and enjoying a more secure retirement. “I would recommend Wilkerson to any retailer considering a going-out-of-business sale,” says Briman. “They’ll help you reach your financial goal. Our experience was a tremendous success.”

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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]

Continue Reading
Advertisement

SPONSORED VIDEO

Wilkerson Testimonials

Retirement Made Easy with Wilkerson

The store was a landmark in Topeka, Kansas, but after 80 years in business, it was time for Briman’s Leading Jewelers to close up shop. Third generation jeweler and owner Rob Briman says the decision wasn’t easy, but the sale that followed was — all thanks to Wilkerson. Briman had decided a year prior to the summer 2020 sale that he wanted to retire. With a pandemic in full force, he had plenty of questions and concerns. “We had no real way to know if we were going to be successful or have a failure on our hands,” says Briman. “We didn’t know what to expect.” But with Wilkerson in charge, the experience was “fantastic” and now there’s plenty of time for relaxing and enjoying a more secure retirement. “I would recommend Wilkerson to any retailer considering a going-out-of-business sale,” says Briman. “They’ll help you reach your financial goal. Our experience was a tremendous success.”

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