You Must Know Your Margin From Your Markup When Discounting!
In a world where special offers are everywhere, it can be easy just to glibly offer a quick discount to get the sale, but do you really know what that discount is costing your business?
As a business owner it’s vital that you know your numbers and non more so than your buying price and your selling price and how much profit you’re going to make.
On the face of it, it’s easy to work out your profit, simply subtract your cost price from your selling price and that gives you your gross profit…
EG:Selling price £10
Cost price£5
-----
Gross Profit£5
But when it comes to discounting and knowing whether you’re still making a profit, it’s essential that you understand the difference between MARGIN and MARKUP.
In the example earlier we bought our product at £5 and marked up the price by 100% to £10
£5 markup by 100% = £10 (£5 + £5 = £10)
BUT
when we sell at £10 we are only making 50% profit that gives us a 50% Margin.
Profit £5 which is 50% (half) of the sale price £10
So when offering a discount to customers, anything more than 50% discount in this example would mean we are making a loss!
You will never make 100% profit on a sale unless you didn’t pay anything for the product in the first place.
KEY LEARNING POINT:
Markup is the amount we add on to the cost price to establish the sales price.
Margin is the percentage difference between Sale Price and the Cost Price.
So Margin is the figure you must understand before starting to discount a product. If you discount more than your margin, YOU WILL MAKE A LOSS!
If you want to chat through knowing your numbers and more strategy around growing your business, why not get in touch?
As well as marketing and advertising, we offer local businesses a Power Hour where we can work with you one to one to help you build and implement a strategy for growth that works.
