Fool Proof Tip to Making a Profit
Being able to win more work means you need to be on top of your numbers and that includes your margins and markups.
Its tender time again and the competition between the number of businesses quoting for key jobs seems to be heating up. So how do you know which jobs are worth fighting for and which ones are not worth wasting your time quoting for.
It all comes down to knowing your margins and markup rates.
What exactly is margin and markup and how are they different?
Sure, both margin and markups are used to determine your gross profit, but after talking to a few our customers it looks like the two terms are often confused for each other. Accidentally confusing these two calculations can lead to you selling your products and services at rates that are either too high or too low, which results in either lost sales (too high) or lost profit (too low.)
- Markup is the percentage applied to your buy cost to determine your sell price.
- Margin however is the percentage difference between your sell price and the cost of goods sold. (ie Sell price less buy cost shown either as a value or percentage.) The gross margin provides a more comparable profit calculation as it removes the cost of your sale from the equation.
Markup values are often used by sales and estimating teams to set the sell price. This percentage is then used to calculate your profit associated with selling that item, service or job. It is often an impressive figure that is a larger number when compared to the gross margin. Unfortunately, because of its high value, many to think that they are making a fantastic profit.
Just remember, if you want to obtain a certain margin, you need to apply a markup percentage to your product cost that is greater than the desired margin. This is because the markup calculation is based on cost not revenue.
Let me show you what I mean.
To determine what your desired gross margin is, you must first establish the selling price you need to achieve your desired gross margin percentage.
For example, if you apply 30% markup to a product that costs $10.00 then your selling price would be $13.00.
Gross Profit Margin = Sell Price – Buy cost ($13 - $10 = $3)
Markup Percentage = Gross Profit Margin/Buy Cost ($3/$10 = 30%)
Sell Price = Buy Cost x Markup Percentage + Buy Cost = ($10 x 30%) +$10 = $13
If a 30% gross margin was required, then the sales price would be $14.28 which means that the mark up rate of 42.8% would need to be applied.
Sell Price = Buy Cost/(1- Gross Margin Percentage) = $10/(1-0.30) = $14.28
Markup Percentage – (Sell Price – Buy Cost)/Buy Cost = ($14.28-$10)/$10 = 42.8%
The following table details the comparable rates between mark up and margin.
As you can see there certainly is a big difference between your mark up and your margins, but by focusing on targeting your margins you will not only refine your pricing structures but also be able to add 2- 3% profit to your bottom line.
QicWorks is a job management solution that has been designed to manage complex rate structures, across multiple entities and worksites, all from the one account. QicWorks provides accurate real time field data giving you the confidence to make the right decisions. Contact us today see how QicWorks can transform how you do business.
The information contained within this blog is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own situation and legislative requirements before making any decisions.