Profit Margin - AAaargh!

[C.A.R.]

I've noticed a trend - the misunderstanding of profit margin.

It is commonly misconceived to be 'markup'.

I work in the construction industry and the understanding seems to be pretty mainstream; that margin = markup.



In-house my company operates on a profit margin target, but this is largely mis-understood not only by our own staff but also our distributors / retailers. If you ask to do a direct quotation on a retailers' behalf, they will regularly ask for a profit margin of 20%. What they mean is- multiply by 1.2

Now it's not a major problem and indeed you could perhaps even say I'm being pedantic, but as the gross profit margin increases the discrepency widens. In the example above a 20% margin is achieved by multiplying by 1.25 / 125% instead. When you have background rebates involved on top which are based on turnover, this is a potential problem.

Is this something everybody recognises in other industries?

I raised a few eyebrows by selling a package of our product at 23% margin when our target is 36%+. Would it come across as demeaning if I pointed out to my superiors that this is still a markup of nearly 30%? I don't want to rock the boat, but I also don't want to spend my future working with idiots.

Rant over.

[Rawwr]

I don't even...

[elvismiggell]

The simplest way I can explain it;

100 / 0.8 = 125.

100 x 1.2 = 120.

One of these is markup, one of these is margin.

[Oakey]

I understand the words but I have no idea what they mean

[ReallyReallyGood]

Is there cake? I was told there would be cake.

[Ari]

My hovercraft is full of eels.

[jas xjr]

amazed me that a lot of experienced retailers did not know the difference between profit on cost and profit on return

[eldar]

Gross vs Nett profit?

[LeoSayer]

C.A.R. said:

I raised a few eyebrows by selling a package of our product at 23% margin when our target is 36%+. Would it come across as demeaning if I pointed out to my superiors that this is still a markup of nearly 30%? I don't want to rock the boat, but I also don't want to spend my future working with idiots.

I don't really understand the maths but, whatever maths you use, you still undershot your 36% target.

[Dr Jekyll]

elvismiggell said:

The simplest way I can explain it;

100 / 0.8 = 125.

100 x 1.2 = 120.

One of these is markup, one of these is margin.

Even simpler.

Buy for £100, sell for £200. Your mark up is 100%, your profit margin is 50%.

[Buster73]

Dr Jekyll said:

Even simpler.

Buy for £100, sell for £200. Your mark up is 100%, your profit margin is 50%.

Unless your selling price includes VAT.

[KevinCamaroSS]

eldar said:

Gross vs Nett profit?

No, in simple terms gross profit is the profit you make on selling the goods, net profit is the profit you make when all your overheads are also added in.

[Landlord]

Buster73 said:

Dr Jekyll said:

Even simpler.

Buy for £100, sell for £200. Your mark up is 100%, your profit margin is 50%.

Unless your selling price includes VAT.

And your buying price excludes VAT.

[AlexHat]

First rule of Profit Club....

[Ean218]

I think this is common across retail trades.

As a wholesaler we are always focussing on our profit margins, yet the retailers only ever work on markup. I presume it is simpler for them as they just buy a few, add the markup and bingo they have a retail price.

Yet wholesaling has a whole host of extra costs, not the least of which are bulk carriage charges, messing with exchange rates, customs duty and possibly customising the product. So for us we have to look at the total cost and see what our actual margin is.

[21TonyK]

You're lucky. I *had* a finance manager who didn't understand how to calculate VAT or the concept of stock on hand.

Oh how we used to laugh at year end

[Trabi601]

21TonyK said:

You're lucky. I *had* a finance manager who didn't understand how to calculate VAT or the concept of stock on hand.

Oh how we used to laugh at year end

Is his username a cattle based product from a principality to the west of England?

[MrBarry123]

Ari said:

My hovercraft is full of eels.

We all know that because chocolate sprinkles ride bicycles with cucumber windows.

[Simpo Two]

Dr Jekyll said:

Even simpler.

Buy for £100, sell for £200. Your mark up is 100%, your profit margin is 50%.

That's how I see it. It just depends which end (the price in or the price out) you work from.

[21TonyK]

Trabi601 said:

21TonyK said:

You're lucky. I *had* a finance manager who didn't understand how to calculate VAT or the concept of stock on hand.

Oh how we used to laugh at year end

Is his username a cattle based product from a principality to the west of England?

It was a "her"... god knows how she survived as long as she did. Moved sideways into position where she could do less damage.