Markup how does it work? This is one of the main ways to price products or services professionally and profitably. However, many professionals end up working the wrong way and end up having losses instead of profit.
Therefore, understand now what Markup is, how it works and how to calculate it according to your business. All in a summarized and very practical way! You want to receive tips and information to set up your own business.
So subscribe to this channel and stay on top of everything you need to know to open your own company. To try to make this matter very clear, let's explain the following points: 1. WHAT IS MARKUP?
2. WHY IS IT SO IMPORTANT? 3.
HOW DOES IT WORK? So let's go! 1.
WHAT IS MARKUP? The markup is an index used to form the selling price, always applied to the cost of products or services. Basically, it is the difference between the selling price and the cost of the product or merchandise.
It represents the total profit or gross profit made on a sale. It is expressed as a percentage of the cost price. The markup concept involves creating an index that guides pricing for specific products and services.
Generally speaking, it represents the difference in cost between the selling price and the acquisition or production price of a product or merchandise. In other words, markup plays a very important role in establishing the total profit or gross profit associated with a sale made. This index is expressed as a percentage in relation to the original cost and its variation is influenced by several factors.
As the company's area of activity, the target audience, nature of the product or service provided, among other points that we will talk about here. And so, make your company achieve the desired profit in a planned and coherent way. 2.
WHY IS IT SO IMPORTANT? FAIR PRICE The development of the markup makes the prices worked by your business coherent, fair and profitable. TRUE PROFIT That is, the markup not only helps ensure that you cover your costs and expenses, but also contributes to generating profits.
CONCRETE BASE In the same way, greater security is generated. Since the markup is calculated based on concrete and easy-to-apply information. So, it's simple to work with and very efficient.
COMPREHENSIVE VISION Furthermore, it provides and maintains the balance of the business. Especially because, as we said, to calculate the markup, you need to understand other information about your company. Not only referring to direct production but indirect as well.
Which is what we are going to explain here. BUT THE MARKUP IS NOT CONTRIBUTION MARGIN As we said, the markup is an index used to determine the selling price. Thus, it is applied to the cost price of a product or service.
Briefly, contribution margin is the percentage of the amount left over from revenues after deducting variable costs and expenses. In other words, basically, it is the percentage of each sale that is generally intended to pay the company's fixed costs and expenses. In addition to enabling the generation of profit.
For this reason, it is often identified as gross profit or gross gain from sales. 3. HOW DOES THE MARKUP WORK?
First, to calculate the markup, you need to understand some pillars. How: FIXED AND VARIABLE COSTS: • FIXED: are all those amounts that will have to be paid, regardless of whether it generated sales or not within a period. For example: salary of employees, rental of machines, among others.
• VARIABLES: are those that vary directly with the quantity produced, in the same proportion. For example: input and raw material, packaging, among others. FIXED AND VARIABLE EXPENSES Expenses are expenses that do not impact directly on the product, but on the company's management.
That is, they are the disbursements necessary to keep the structure working. However, they do not directly contribute to the production of the products or services that will be marketed. As an example, we can mention the following: • FIXED EXPENSES: rental of the establishment, internet and telephone, monthly fee from fixed suppliers (such as an accountant or cleaning service) • VARIABLE EXPENSES: equipment maintenance, investment in Marketing, sales commission, among others.
PROFIT MARGIN It reveals the amount of profit coming from the commercialization of products or services. This margin is presented in percentage format, reflecting the ratio between profit and total revenue. In other words, it gives you a bird's-eye view of your company's financial strength.
With that in mind, the markup calculation is done as follows: Markup = 100 (which represents the unit sale price in percentage)/100-(Fixed Expenses + Variable Expenses + Profit Margin) With the result of this formula, now you need to multiply it by the cost of production. And so, arrive at the final price of a product or service. To do this, just follow the following formula: Markup (%) = [(Sales Price – Production Cost )/Production Cost)] x 100 So, considering all that, let's show an example in practice to try to make it clearer.
EXAMPLE: Imagine Ana Paula, who owns a cake shop. Because of the increase in inputs, she had to increase the price of chocolate cake, the house's flagship. To produce this product, before, she spent R$ 50.
00. But now it costs R$60. 00.
Still, Ana Paula considered that for this cake, fixed expenses are 12%, variable expenses 8% and its desired profit margin is 20%. Considering this, the new price of the chocolate cake would be done through this markup calculation: • Markup = 100/100-(12+8+20) • Markup = 100/100-40 • Markup = 100/60 • Markup = 1 ,6 Thus, to apply this markup in the formula to transform it into a %, it is necessary to multiply this result by the current cost price, which in this case is R$ 60. 00.
Which results in R$ 96. 00. As a result, Ana Paula discovered that in order to have a 20% profit margin and be able to cover the new costs of R$60.
00, the selling price of the chocolate cake needs to be R$96. 00. Finally, just apply this result to the Markup percentage formula to find your percentage.
So: • Markup % = [(96 – 60) / 60)] x 100 • Markup % = [36 / 60] x 100 • Markup % = 0. 6 x 100 • Markup % = 60% Therefore, the percentage of markup is 60%. That is, Ana Paula needs to charge 60% more than the cost price of the chocolate cake to cover her expenses and have a profit margin of 20%.
Did you see how the Markup is very simple to calculate and very powerful for your business? For sure, when well worked, it will be a key factor to make real profits in your company. And so, build and maintain a solid foundation to be able to grow always.
In a healthy, planned and responsible way. Also, if you want to understand how to set the right price for your business, watch our playlist that shows just that. To watch it, just click on this button above or on the link in the description.
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And just to recap what we talked about here: 1. WHAT IS MARKUP? 2.
WHY IS IT SO IMPORTANT? 3. HOW DOES IT WORK?
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