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08-27-2004, 02:59 PM | #1 (permalink) |
Join Date: May 25 2002
Posts: 970
Rep Power: 22 | Myths about markups A common misperception about markups for your price points is: $10 cost $20 sell price = 100% markup This is markup based on COST. The only problem is your business isn’t based on costs, it’s based on sales. Therefore your markups must look like this: $10 cost $20 sell price = 50% markup (commonly referred to as ‘keystone’) and $10 cost $18 sell price ($8 gross profit) = 44.4% markup ($8 gross profit divided by the $18 selling price) Why? Because the first $10 of your selling price is just the recovery of your cost and no markup exists on returning your own money to your own pocket. It’s only the gross profit that markup is calculated against and is known as markup based on selling price. (therefore there is no markup based on cost) Why do this? Because accounting and running your business depend on numbers that are accurately using markups based on selling price. For example: Sales $5,000 = 100% Minus Cost of goods sold of $2500 = 50% = Gross profit of $2500 = 50% Less Total Business Expenses of 45% = 5% net profit This enables you to clearly ascertain from your P/L statement whether your markups are too low or your expenses are too high or both! As you can see, if your overall average markups are running 44.4% but your expenses are 45% of sales – oops – a loss of .6% Here is a markup calculator: MARK-UP CALCULATOR COST X = % GROSS PROFIT 1.112 = 10% 1.471 = 32% 1.137 = 12% 1.493 = 33% 1.177 = 15% 1.516 = 34% 1.205 = 17% 1.54 = 35% 1.25 = 20% 1.563 = 36% 1.299 = 23% 1.588 = 37% 1.316 = 24% 1.614 = 38% 1.334 = 25% 1.64 = 39% 1.352 = 26% 1.667 = 40% 1.37 = 27% 1.695 = 41% 1.39 = 28% 1.725 = 42% 1.41 = 29% 1.755 = 43% 1.43 = 30% 1.786 = 44% 1.45 = 31% 1.82 = 45% 2.00 = 50% 2.222 = 55% Take a strong look at your markups and your expenses and adjust if you can wherever you can. It means more profit to you when you do. |
08-27-2004, 11:41 PM | #4 (permalink) |
Join Date: Oct 25 2003
Posts: 159
Rep Power: 21 | Thanks for the brain cramp! That formula is not only true with lotions, but lamps, and beds. Perfect example of how distributors who own salons can have such an advantage over the average salon owners. WHAT TO DO! HELP GRIP! _________________ [ This Message was edited by: Standby on 2004-08-28 12:13 ][ This Message was edited by: Standby on 2004-08-28 12:14 ] |
08-30-2004, 05:20 PM | #5 (permalink) |
Join Date: May 25 2002
Posts: 970
Rep Power: 22 | OK, here's some help... Before purchasing an item, put it through the markup test. Can the item withstand a 55%-60% markup or better? If it can, it merits additional buying consideration. Can the item withstand only a 48%-50% markup? Then it doesn't get additional consideration and must stand on its own merits. The reason for this thought process is simple: markdowns must occur when the item doesn't sell through at retail and your expenses can go up. In either case, with higher margins, you're covered or partially covered. |
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