This is probably so basic an 8th grader would know but it has me confused.
I want to increase a price with a 10% markup. I was multiplying the price by 1.1 when a co-worker said no, you should divide by 0.9. My first assumption was that they’d give the same result but a few seconds with a calculator disabused me of that notion.
2000 * 1.1 = 2200
2000 / 0.9 = 2222.22
The 1.1 version “feels” more right to me as 200 is clearly 10% of 2000 and the results are added. Of course, the salesman I just talked to prefers the extra money with the 0.9 method. So which one is the correct way to add a 10% markup to a number?
Whew…glad I am not as inept at math as I thought. I was told to put a 10% markup on a bill of materials and I am glad to see I did it correctly. As mentioned the salesman wants the bigger number with the 0.9 method so if that’s what he wants then that’s what he’ll get regardless of whether it is a true 10% markup or not.
Turns out my salesman says the 0.9 thing is to get a 10% margin on gross profit or something like that. His theory is he wants 10% on the 2200 and nto 10% on the 2000. Frankly I still don’t get it and the 0.9 thing doesn’t seem quite right but it’s simple enough to get him close to what he’s looking for. Since our markups are a flexible thing it is not a critical item to be spot on. We’re trying to land a probe on Mars or anything.
I’ve seen this used by unscrupulous people when they want to pretend they’re giving you a discount. By dividing by 0.9, they can then present the result as the real price; after that, they can “give” you 10% off and get back to the real, real price since x / 0.9 - (10%) = x.
The difference you need to understand is between MARK-UP and MARGIN (margin is also called DISCOUNT).
Mark-up is calculated from the seller’s cost of goods. If you pay 2000 for a widget, and want to sell it with a 10% mark-up, you add 10% of your cost to that cost to determine the selling price. In this example, 2000 + 10% x 2000 (which is 200) = 2200. By buying for 2000 and selling for 2200, you have a mark-up of 200, or 10%.
Margin is calculated from the selling price of goods. In simple arithmetic, it’s the selling price minus the seller’s cost. The amount of the margin is the same as the amount of the mark-up, but the percentage value is different, because one is a percentage of the cost and the other is a percentage of the price. In the above example, the margin of 200 is 9.09%, because 200 is 9.09% of 2000. If you want the margin to be 10%, divide the cost by 0.9 to determine the price, which here would be 2222.22. Then 10% of the price is the margin (the other 90% being the cost). With a 10% margin, the mark-up is 11.11 percent.
Here are some simpler examples:
If you buy a widget for 50 and sell it for 100, you have a 100% mark-up and a 50% margin.
If you buy for 50 and sell for 75, you have a 50% mark-up and a 33.3% margin.
If you buy for 75 and sell for 100, you have a 33.3% mark-up and a 25% margin.
If you buy for 10 and sell for 100, you have 900% (yeah, nine hundred percent) mark-up and a 90% margin.
Once you decide whether you want to deal with a mark-up or with a margin, it’s just a matter of arithmetic. The tricky part is making sure everyone involved knows the difference between the two. Sadly, I’ve seen that a lot of business people don’t understand the difference.
I still do not get it. Or rather I get the math but it seems like they are pulling an accounting fast one. If I buy something for $2000 and sell it to you for $2200 it looks to me like I made 10% but they want me to believe I made less than 10% unless I go to the $2222.22 price.
I posted before seeing GaryT’s post which helps alleviate my confusion. I still think it is an accounting shell game but I can now see what is going on at least.
Flip it around and it will make sense. If I sell something for $2,000 and I bought it for $1,800, I’m making $200 in profit. $200 is 10% of $2,000, so I’m making a 10% profit margin.
It all depends on whether you’re starting from the wholesale price or the retail price. If you start from retail ($2,000 in this example), then you’re working off a discount of 10%, which is equal to your profit margin.
If you start from wholesale ($1,800 in this example), then you’re working off a markup of over 11%, which is what you need to reach your $200 profit margin.
No accounting fast ones at all. In my business (books) we don’t even look at markups. Everything is figured on profit margins.
Not a shell game, but a difference in definitions. Gross Profit % is a very specifically defined accounting value, namely GP divided by Revenue. If you wish to show a 10% Gross Profit via the sales of this product, you MUST divide your cost by 0.9 to calculate your price.
Now, here is an important point. If you already have a price of $2000 and want to increase your price by 10%, you use the 1.1 method. You are not talking about Gross Profit anymore, but are talking about increasing a known value by a known percentage, simple arithmetic.
Dividing a price by 0.9 doesn’t have any particular meaning in accounting or finance.
Dividing a cost by 0.9 (specifically, 1-GP%) is an extremely important technique in product pricing, and is constantly screwed up by non-pricing folks.