***** For the video version where I draw you some pictures and explain personally: MarginVsMarkup.com *****

A lot of us specialty food producers got into the business through a love of making delicious food, and not through a love of numbers.

So, for many of us, it takes time to understand pricing.

**Understanding the difference between “Markup” and “Margin“** can really help.

I was a natural foods grocer for 12 years before starting up Yummy Yammy, my fabulous roasted sweet potato salsa company, so I made up a quick worksheet that may be helpful to you.

*** Take a deep breath, and start by believing that you can grasp this. It just takes a few minutes to understand the use of margin vs markup. And you can refer to these charts again any time.

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**CALCULATING MARGIN & MARKUP:**

**Margin** (the more sophisticated and useful way for a retailer to set prices) is the **retailer’s profit dollars** *expressed as a percentage* of their **RETAIL SELLING PRICE on the store’s shelf.**

**MARGIN = PROFIT DOLLARS / RETAIL PRICE**

~~~

**Markup** (a less sophisticated but workable measure) is the retailer’s same **profit dollars** *expressed as a percentage* of the** WHOLESALE PRICE — what they paid you, the vendor**.

**MARKUP = PROFIT DOLLARS / WHOLESALE PRICE**

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**SIMPLE EXAMPLE: So, let’s say a retailer buys a product from you for $5 and then sells it for**

**$7.50.**

Your wholesale price to the retailer: $5 (WHOLESALE PRICE)

+ The retailer’s profit dollars on the sale: $2.50 (PROFIT DOLLARS)

= The retailer’s selling price on the shelf: $7.50 (RETAIL PRICE)

**Margin:**

Remember? **MARGIN = PROFIT DOLLARS / RETAIL** **PRICE**

So, you’ll calculate that** $2.50** of **PROFIT DOLLARS as a percentage of their RETAIL PRICE ($7.50) **to get the

**Margin**

**So,**

**$2.50**/ $7.50 =

**33%**

So, this sales arrangement will give the retailer a

**33%**

**MARGIN**

**Markup: **Remember?

**MARKUP**=

**PROFIT DOLLARS**/

**WHOLESALE PRICE**

So, you’ll calculate that

**$2.50**of

**PROFIT DOLLARS**as a percentage of

**WHAT THEY PAID YOU, the vendor**($5.00) to get the

**Markup**

So,

**$2.50**/ $5.00 =

**50%**

So this sales arrangement will give the retailer a

**50%**

**MARKUP**

**In both cases, you are still selling for $5, and the retailer is still making $2.50 on any $7.50 sales.** The difference is simply which process the retailer uses to calculate that $7.50 is the right selling price for their store. (Why does this matter? See below.)

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**MARGIN & MARKUP TRANSLATION CHART**

Here’s a handy chart showing some common margin/markup numbers, and how to translate between them. Each of these pairs of numbers always translate to each other, the way that *cielo *always means sky in Spanish, and *sky *always means cielo in English.

**margin**= 25%

**markup**

**margin**= 33%

**markup**

**margin**= 50%

**markup**

**margin**= 60%

**markup**

**margin**= 70%

**markup**

**margin**= 80%

**markup**

**margin**= 90%

**markup**

**margin**= 100%

**markup**

~~~~~

**MARKUP-TO-MARGIN & MARGIN-TO-MARKUP**

And, when you need to calculate a number not listed in that chart, you can do it yourself easily.

When you **know the markup**, you can calculate the **margin.**

**Margin = markup divided by (1 + markup)**

*Example – If you know the retailer uses a 70% markup:*

margin =

=

=

**70%**/ (1 +**70%**)=

**.70**/ (1 +**.70**)=

**.70**/ 1.70**= 41% margin**And when you **know the margin**, you can calculate the **markup.**

**Markup = margin divided by (1 – margin)**

*Example – If you know the retailer uses a 41% margin: markup = *

**.41**/ (1 –**.41**)**.41**/ .59**= 70% markup**~~~~~

**Are you a Markup Person? Or a Margin Person?**

Just like you, retailers can be a little nervous around numbers. So a retailer usually relies on their personal favorite method, the one that makes them feel most comfortable.

Either they are a **Markup person** or a **Margin person**:

A **Markup person** takes your $5 and **MULTIPLIES it times (1 plus their markup %)**

That means a retailer who operates with a **60% markup** will do this:

Wholesale x (1 + **markup %**)

$5 x (1 + **60%**)

= $5 x (1 + **.60**)

= $5 x 1.60

= $8 (so they’ll sell it for $7.99)

A **Margin person** takes the $5 and **DIVIDES it by (1 minus their margin %) **

So a retailer who operates with a **37.5% margin** will do this:

Wholesale / (1 – **margin %**)

= $5 / (1 – **37.5%**)

= $5 / (1 – **.375**)

= $5 / .625

= $7.99

***** Great job trying out all this new stuff! When you’re done reading, come over to MarginVsMarkup.com for some video support. *****

You’ll notice that **the selling price is the same**, whether the retailer uses “**margin**” or “**markup**” as a way to calculate their profit. **So what the heck is the difference?!? **

If you don’t like thinking about numbers in this way, don’t worry about it. Think to yourself, “Well, some people speak in French, and some people speak in German.” You have now become bilingual enough to speak both languages, so that’s great. Your life as a specialty food producer will be a little bit smoother.

But if you want to know why it matters . . .

**The Advanced Stuff: Why is using “margin”** **calculations to set prices a more sophisticated model than using “markup”?**

Mostly because when a business owner/manager analyzes the company’s financial statements, all the income and expenses are expressed on those documents as **a percentage of the business’s total sales**. They’re looking at profit dollars earned, *expressed as a percentage of sales *(that’s “gross profit margins”). They’re looking at labor costs* as a percentage of sales*. They’re looking at marketing *as a percentage of sales*. They’re looking at discounts, returns, administration overhead, *all as a percentage of sales*.

Since setting selling price using “**margin**” is **also a comparison to total sales dollars **(remember? Margin is the %age using the retail sales price, markup is the %age using the wholesale price), you are sort of speaking the same language when setting today’s selling price as you will be when you review your quarterly statements. This helps a retailer better see where the profit gaps might be. Example: You’re pricing for an overall **50% profit margin**, but your statements show you’re only earning a gross profit margin of **41%**. You can instantly see something’s amiss.

If, however, you’re pricing individual products every day with a **100% markup**, then analyzing your statements to find out if your overall store made your **50% profit margin**, it’s confusing, and you have to constantly translate between mathematical languages. And 100/50% comparisons are the easy ones! How about if you’re pricing at a **60% markup**, and quarterly hoping to achieve a **37.5% profit margin**? *Way too confusing. *It’s like a dinner where one person is speaking Russian and the other replies in Swedish.

**So, retailers, set your pricing strategy to easily compare with the gross profit margin you need to reach on your quarterly and yearly financial statements**, and you’ll have a clearer goal.

**So, want to achieve a 50% gross profit margin for the whole store? Then you had better be pricing most of your individual products at about a 50-60% margin calculation. **(The slightly higher pricing tactic will help you account for waste, theft, returns, spoilage, and breakage — what is called “shrink”.)

**But specialty food producers, you had better be able to converse in both languages** with your retailer partners. Surprisingly, there are many grocery and retail workers (and even managers!) out there who have no understanding of the huge difference between markup and margin.

So if you go in there with a new product, and you ask them what their **margin** is, and they casually say, “We use a **44% markup**,” you had better check whether they **really **mean a **44% markup**. That’s very low, depending on the kind of store. But a **44% margin**, that may be more normal.

Example: if you wholesale your items at $10 each, their **44% “markup”** would put your product on their shelves for **$14.40.** Not too many retailers are going to stay in business that way. But — if they’re actually using a **44% “margin”,** that would mean they sell it for **$17.89. **So if you’re exploring what to price your products at, partly based on what the shelf price will be, this little detail is HUGE!

**And storeowners, you can see how essential it is that your buying staff get this right**… because in this above example, you are either making **$4.40 of gross profit dollars** on that product when it’s sold, or you’re making **$7.89 profit on each sale**. If you think your buyer is earning you $7.89 on every sale, but she’s earning you $4.40, and you don’t find out there’s a problem til 3 months from now when you review your statements, after $100,000 of sales at the wrong price … WHOA! Trouble.

***** Hope you’ve found this helpful! Now come on over to MarginVsMarkup.com for your free video access, and to see the handy toolkit I designed to teach your staff and help you remember the key points right at your desk, where it counts. *****

Hope this helps!

Lisa, Yambassador, Yummy Yammy

You go Lisa-girl. With your passion, you are a guaranteed success. Just be sure to take some down time, otherwise you’ll burn out. I have got to make time to come up to Hardwick.