Setting Prices: Margin vs. Markup

*** 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.

Yummy Yammy sweet potato salsas

As a specialty food producer, I really need to know the difference between margin and markup.

*** 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.

~~~~~~~

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 DOLLARSRETAIL 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

~~~~~~~

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.)

~~~~~

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.

20% margin = 25% markup
25% margin = 33% markup
33% margin = 50% markup
37.5% margin = 60% markup
41% margin = 70% markup
44% margin = 80% markup
47% margin = 90% markup
50% margin = 100% markup
etc.

~~~~~

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)

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

Like what you've read? Join the tribe. (And get a gift, on us.)

This post was tagged , , , , , , , , , , , , , , , , , ,

One Response to Setting Prices: Margin vs. Markup

  1. 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.

  • Get 50% off one order of our delicious Yummy Yammy sweet potato salsas when you buy on Amazon:

  • *NEW* Sweet Potato Cookbook!

    Yummy Yammy Cookbook
  • Yummy Yammy now at Target!

    Framingham, Woburn, Taunton, MA

    We are now going into 3 Boston-area Target stores: we're already in Framingham, and next week will be in Taunton & Woburn. Yay! And, we have 60 days to prove ourselves there. If enough people buy, they'll add us to more stores; but if not, we'll lose our spots. YOU can make a huge difference! Please tell your Boston-area friends to find us at Target in Feb & March! Extra credit: Post a photo to Instagram, Facebook, Twitter!

  • Upcoming Events

    Loading...
  • Customer Raves

    Loading Quotes...
  • Recent Posts

  • We LOVE to hear from you. Do you have a picture to share? Do you have praise, or a complaint, or an idea? How have you used our products? We want to hear all about it.

    Lisa@YummyYammy.com
    802-291-1718

  • Upcoming Events

    Loading...
Yummy Yammy