Episode 3 – How to Calculate Product Margin vs. Markup




Marketing Stuff You Should Know show

Summary: Many rookie business owners make this mistake when pricing their products and don’t realize that they are not making as much money as they should, or could. The difference between a margin and markup is whether or not you take into account the cost of the goods you are selling.  Let me give you an example. If you buy something at wholesale for $2.00 and want to add a 35% margin, the retail price will be roughly $3.08.  However, if you only added a 35% markup to the $2.00 wholesale cost, you would be selling the product at retail for $2.70.  A difference of 38 cents. That’s not a whole lot of money when you sell one item for a couple of dollars but imagine selling thousands of items with an incorrect margin or selling items that have a much higher wholesale cost.  Those mistakes could literally cost you thousands or even tens of thousands of dollars very quickly. Here’s how the math works.  If you’re trying to calculate markup (and let’s use 35% as an example) then you simply take the wholesale cost of $2.00 and multiply by 1.35.  That gives you the total of $2.70. To calculate at 35% margin on a $2.00 product you need to divide by .65.  We get the .65 by subtracting the margin (which is .35) from one.  Just as an example, if we wanted to calculate a 30% margin we would subtract .30 from one which would give us .70 and a 40% margin would be .60. So getting back to the math of a 35% margin on a $2.00 product.  On a calculator we would type in 2 (which is the wholesale cost) and then divide by .65 so we get a total of $3.0769 or $3.08. Finally, another common question people ask when talking about margin is “what percent margin should I use when figuring out pricing for my products”.  Although there is no hard and fast rule (and it will depend on the industry) I usually go with a 30 to 35% margin if you have to stock the product and something closer to 20% if you can get your vendor to drop ship for you. If you have comments or input on anything discussed here please leave a comment below.  Thanks....