I’ve been getting a lot of questions about how to properly price things. Here’s a video I did on Mark Up vs. Margin from the vault. Money Math doesn’t change…
Bill Gilliland here for this week’s action business tip and it’s another money mastery minute but a great question last week from one of our viewers and it was on what is the difference between markup and margin and simply put markup is based on your cost or what you pay for your merchandise and margin is what you actually make on it.
So it’s based on your selling price, let’s put some numbers in here and show you the difference and show you how to put a little bit more money in your pocket by pricing smarter.
If you wanted to have a 30% mark-up then let’s say it costs you $100, so to have a 30% mark-up then you would multiply it by 1.3 which would give you a selling price of 130 dollars and you would say hey I make $30 or 30% margin.
Well that’s not right because remember you had a thirty dollar markups he had a 30% markup but your margin is actually based on your selling price so it’s a hundred and thirty minus a hundred which is your cost over your 130 so you have 30 over 130 which let’s do some quick math here so 30 divided by 130 equals 0.23 or 23%. Wow so you don’t make 30%.
When you multiply by 1.3 now for pricing purposes if you’d like to make 30 percent which is my suggestion you pick what you’d like to make on it and the way to do it is to take your hundred and you want to divide it by one, minus the margin that you would like to make.
So in this case that would be 100 divided by 1 minus 0.3 or 100 divided by 0.7 which will do our handy-dandy calculator 100 divided by 0.7 would give us 142.85.
So if you want to make 30% margin instead of selling at 130 dollars you have to sell it at 142.85.
To check your margin you take your 142.85 which is your selling price less your hundred dollars which is your cost which gives you a 40 to 85 margin and you divide that by your selling price so your margin is your is your dollar markup divided by your selling price which gives you 30% so it worked.
So to make sure that you’re making the margins that you need to make to run your business then you want it you want to actually price by dividing
by 1 minus your margins – you take your your cost and divide it by 1 minus your margin and you will put more money in your pocket.
So that’s this week’s money math minute minute I hope it helps you put more money in your pocket and we’ll see you next week.
Enjoy the learning, and…
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