Wholesale Markup versus Profit Margin
I was going to write about product pricing strategies and methods then realized there are several key concepts we need to understand first. The first of these concepts is the difference between wholesale markup and profit margin. These both refer to the same value but have considerably different meanings. And misapplying these terms can be the difference between being profitable and losing money. Looking at the two equation below we are talking about “Markup” in the first equation and “Profit” in the second. With just a little bit of math we can easily see that Markup = Profit.
Wholesale Price of Item + Markup = Retail Price
Retail Price – Wholesale Price of Item = Profit
Wholesale markup is the amount you add to the wholesale price of an item to calculate the item’s retail price, expressed as a percentage of the item’s wholesale price. The wholesale markup tells us how much we add to the price of the item to calculate the retail price. So wholesale markup = $ amount of markup / Wholesale Price of Item. If an items costs $5 and we mark it up $7.50 the wholesale markup is 150% ($7.50 / $5.00).
Profit margin is the amount you make off the sale of the item, expressed as a percentage of the retail price. The profit margin tells us how much of the retail price is profit. So profit margin = Profit / Retail Price. If we sold an item for $12.50 and the profit from the sale is $7.50, then the profit margin is 60% ($7.5 / $12.50).
If we used our profit margin instead of the wholesale martup to calculate our retail price we could be in trouble, even cause our business to lose money in the long run. All of our business’s operating expenses, including our salaries, are paid out of the profit from product sales. Lets assume you need a 150% wholesale markup so you have enough profits to pay your operating expenses and yourself. But instead of using your wholesale markup to calculate our retail price you use your profit margin. The product costs $5.00. You markup it up 60% or $3.00. This makes the retail price $8.00. You make only $3.00 per sale instead of the $7.50 you need. You end up losing your salary and hoping you have enough to cover the rest of your operating expenses.
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[...] thing I forgot to mention in the post Wholesale Markup versus Profit Margin was that markup and margin have an inverse relationship. This means that you can easily calculate [...]