Markup vs. Margin
There is a great deal of confusion among the populace concerning the terms markup and margin. I encounter it all the time. I guess the way we use the terms are also part of what makes them confusing. The impact on the service plumber is big, but when these terms are not used correctly with the new construction plumber, it is devastating.
The new construction plumber takes his costs and then does a markup for overhead and profit. When markup and margin is confused and not used correctly, he is going broke and it is just a matter of time before he does. A markup of 20% for overhead and 10% for profit is really yielding only 23%. That 7% difference is why he is losing money. With most plumbing contractors I can guarantee to cover more than my annual fee with this one tip alone.
How much do you mark up your materials? I’ll ask. Generally, I’ll get a response like 40 or 50%. When I ask them how much margin they are getting on their materials, I get the same answer – 40 to 50%.
Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price. While gross margin percentage is the percentage difference between the selling price and the profit.
As a brief example, a markup of 25% will yield a 20% profit. Let’s us the cost of $100. A markup of 25% is 100 x 1.25 = 125. To get the profit percentage, the $25 profit is divided by $125 (selling price) and is 20%. This 20% is your profit margin.
I have always done my markups based on the margin I need to achieve. This basic algebra looks like this: Cost / (1- margin needed) or 100 / (1 – .20) = 125 to yield a 20% profit margin.
A 50% margin will look like this: 100 / (1 – .50) = 200. Your actual markup is 2 times or double the cost, but your margin is 50%.