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Margin v. Markup

One of my clients (a landscape designer) sells design time by the hour, and products priced above her cost for an additional revenue stream.  Should she markup her products 20% or add a 20% margin? It may seem a matter of words, but there’s potentially significant financial impact in her decision.

If you’re selling with a markup (multiplying by 20%), you’re not getting as great a return as if you were to divide by 80%, which represents at 20% margin. For example, let’s say you have a product cost of $2.  If you multiply this by 1.2, you get $2.40 for your 20% markup. But if you instead divide this by .8, you get $2.50, reflecting a 20% margin. It’s only ten cents in this example, but if you’re dealing with several thousands of dollars, the difference is more dramatic.

So decide now whether your pricing will be calculated using a margin or markup; then, communicate accurately when you publicize pricing promises to match your client’s financial expectations.

One Response to Margin v. Markup

  1. Jeannie Kee May 17, 2012 at 9:49 am #

    Good point. Every dime counts!

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