Markup Versus Gross Profit Margin
We’re glad you took an interest in this topic on margin and markup. This topic explains the difference in gross profit margin (or profit margin) and price markup.
There is a big difference between markup and gross profit. In fact, this is one of the most common errors contractors make and it can cost you big.
Markup and margin, what’s the difference?
Markup is a percentage of the cost.
Margin is the same dollar amount expressed as a percentage of the selling price.
Item costs $1.00 Items sells for $1.50.
Markup is .50 or 50 percent of the cost.
Margin is .50 or 33 a percent of the selling price.
A More Detailed Explanation
Markup is the difference between invoice cost and selling price. It may be expressed either as a percentage of the selling price or the cost price and is supposed to cover all the costs of doing business plus a profit. Whether markup is based on the selling price or the cost price, the base is always equal to 100 percent. Markup is the additional amount added to a sales proposal (bid) or price and which contain overhead, profit, excess costs, etc.
The difference between net sales and the cost of goods sold. It is also referred to as gross profit. Gross Profit/Total Sales. The percentage of every dollar earned that can be used to pay general and administrative expenses.
Margin Versus Markup Formula
Applying a simple formula will determine how much the margin will be based on a percentage that the contractor expects to make. The contractor will set a margin that ensures that they will be competitive in the local market. It may or may not reflect the actual value of an item. In your example, we are looking to make an 60% margin assuming that our item costs $10. To figure out our sales price we use the following formula, expressing the margin as a decimal (i.e., 60% = .60):
Retail Price = (Cost of item)/(1, desired margin)
Markup Versus Margin Table
|Markup %||Gross Profit Margin %||Multiplier %|
So if you mark up a $100 part by 25%, you will be selling it for $125 with a gross profit margin of 20% and a gross profit of $25. This is where many contractors make their mistake. They are told their overhead is 25% so they mark up equipment and items by 25%. That results is a 20% gross profit margin and creates a net loss of 5%.
Please also see: How to Calculate Gross Profit Margin, How to Calculate the Selling Price of an Item, and HVAC Dictionary of Accounting Terms and Definitions
©2006-2012 MrHVAC.com LLC, All Rights Reserved. You may duplicate this document provided the copyright notice stays intact and the document is not redistributed or offered for sale.
Thanks for the great, simple explaination and table.
Question: I repair cars and sell parts to my customers. For years we have marked up parts 30%. Should we sell our parts utilizing the margin formula?
Not necessarily. If you are charging enough for labor it may be that your parts markup is correct. The most important thing is your overall gross profit margin.
What a great find! This was explaned to me and I di not understand a thing until I read up on your website. You have been of so much help to me! I have an assignment I have to complete at work and was afraid of saying I did not understand this paert of the task. Thanks again.