April 21, 2017

Should You Use Margin or Markup When Determining Your Price Points?

margins vs markupA question came in the other day that I’ve gotten a few times so figured it was worthwhile answering it publicly here.   Since there is a difference between markup and margin, people wonder if it’s better to use one over the other. Specifically, one reader asked that since markup and margin give you different numbers should you pick the one that makes you the most money.

It’s important to understand that one is not necessarily better than the other and neither markup or margin will necessarily yield you a greater profit.  Instead, you need to be cognizant of the fact that the two words – markup and margin – have two different equations and thus will render two different results even if all the other numbers in the equation (your products costs and product prices) are staying the same.   If you’re getting  X% margin then that means you are getting Y% for a markup – the dollar profit in both cases remains the same though.

Typically – a word I hate to use because it seems as though there is so little that is ‘typical’ in the food industry – everyone you talk when communicating with buyers will be dealing in margin and not markup. Retailers will usually want to know what their margins on products will be based on your manufacturers suggested retail price (MSRP) so this is information you should know ahead of time.  For example, it’s nice – and portrays an air of professionalism, if you are able to say when asked that your wholesale price and MSRP yields the buyer a Z% margin without needing to turn to a calculator to figure it out.   However, occasionally you will meet people who will want to know about the markup instead of the margin so it’s advisable to also know that number – that with the same wholesale price and MSRP yields AA% markup.

Lastly, the other key thing to know is that the financial world deals almost exclusively in margins, not markup. A lender, a bank officer, a CPA, or someone else you may interact or talk with in the financial world is going to be interested in your margins (among other percentages they find interesting in your balance sheet) and do not care about your markup.

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