Learn the difference between margin and markup, plus a quick & easy way to calculate the margins you have on your business product or service.
Margin versus Markup. Aren’t they the same?
A lot of people think that, but they are actually quite different. And we are going to talk about what the difference is today and how to actually apply it to your business.
So, let’s start with what a markup is? Most businesses know what that is. Let’s for today, hypothetically say you are in the widget business. And each widget you buy wholesale is one dollar. And then you mark it up to sell it at retail price at two dollars. That would mean that your markup is 100 percent. Now, the markup is just one piece of a financial system that you want to master.
What you really need to be focusing on before you markup your widgets is your margin, okay? Now, the margin has all the expenses that takes to run your full business. So, if you have office space, that is accounted in it. Or your light bill, that is accounted. Or if you have employees that you need to pay, that’s included. Even down to the pens that you use and the paper that you use.
How to Calculate Your Margin
So, how you calculate your margin is you take your total revenue, minus total expenses, and that will equal your profit. Then you take your profit, you divide into your total revenue, and that will give you a percentage. And that percentage is your margin. So, always figure out your margin first, before you do your markup. So, you don’t lose money on all your widgets.
Great advice, Crystal. Thanks for sharing that with us.
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