#1 - Many Business Confuse Markup and Profit Margin. The financial health of your business is determined by how much profit you take home after expenses. Not how much you mark up the cost of a product.
#2 - Here's How to Calculate Profit Margin.
- Determine net income (Revenue – Expenses): $125 - $100 =$25
- Divide net income by revenue (also known as net sales): $25 / $125 = .20
- Multiply total by 100 to get profit margin percentage: 0.20 x 100 = 20%
#3 - This is Markup. The small difference of this calculation error, has a major impact on your actual profits and income.
- Determine the cost of your product/service: $100
- Multiple it by the mark up you want : $100 x 0.25 = $25
- Add the markup to the cost of your product/service to get price: $100 + $25 = $125
You wanted a 25% profit margin, but in reality you're only making 20% due to a common calculation error.
This is why many small businesses are earning less profits and less income than think.
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This is a concept that even I made a mistake, by the way, even being a business major.
When I started a tour company, I wanted to make like 20% and I just did a markup of 20% and I was making in like 17% in the end or 16%.
I was losing out.
We did this exercise.
The other day, and, you know, if you if you do this properly to make what you want, then you have enough probably to cover some of your overhead and make what you need to pay salary, etc.
This is a really common mistake.
You can see that's a huge difference, right?
I sell for $125 instead of $133.
Then out of every hundred dollars I'm losing eight dollars.
Which is about six percent!!!
That means almost every business owner could easily be increasing their price by 5 %- 10% and no one will notice.
Typically, you probably won't lose any clients, but it'll make a big difference to your bottom line.