Margin and Markup

Margin and markup are important concepts for any business selling a product. It is a number that defines the amount of gross profit you are making off of each product. You can use the values of margin and markup as guides for setting the prices of your products. Unless there is a strong reason, you should set a fixed markup for every item that you sell. Some reasons why you wouldn't set a fixed markup are using a loss leader to attract traffic, competitor's pricing, very high or very low volume sales, higher sales costs, etc.

Margin

Margin is simply the difference between the cost of a product and the price you sell it for. If you had a widget that cost \$8.00 to produce and you sold it for \$10.00, you would have a \$2.00 margin in that product.

Markup

Markup can be calculated based on price or cost. Using the example above, the markup based on cost is 25%. The markup based on price is 20%.

Calculating Markup

This simple calculator gives you the markup, calculated both with price and cost:

Summary

When you know the markup of all the products you sell, you will know which products are making you money and which aren't. You will want to change the pricing or eliminate the product that is not making you money. Your adjustments should bring all of your products up to a level where they are profitable and are worth your effort.

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