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MARKUP AND MARGIN
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In association with
Understanding the difference between
these two calculations can have serious
consequences on your bottom line.
Markup is based on cost, and Margin is based on revenue.
If your business outsources $500,000 each year to third
party suppliers, then we could be talking about a $25,000
difference. But what if you outsource $1,000,000 - then
it could be a $250,000 difference straight to your bottom
line! This book seeks to explain these two unassuming
terms, how to calculate them, and when to use them.
MARKUP AND MARGIN
Contents
4
ABOUT THE AUTHOR
6
MARKUPS AND MARGINS ARE DIFFERENT
8
MARGIN - HOW TO CALCULATE YOUR SELL PRICE
9
MARKUP - HOW TO CALCULATE YOUR SELL PRICE
10
OPPORTUNITY
11
HOW MUCH?
12
JUSTIFY YOURSELF
14
WHEN TO APPLY?
16
DISCLOSURE
17
WHAT’S NEXT?
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ABOUT THE AUTHOR
Kathryn is the go-to finance guru for Australia’s peak
industry bodies and creative agencies.
With 30 years international experience as a consultant,
keynote speaker, workshop facilitator, and mentor - Kathryn
is truly passionate about the MarComms industry.
Kathryn liaises closely with Australia’s Communication, PR,
and Design councils, and is the creator of the only MarComm
specific commercial workshop “Show Me The Money®”
focusing on Intellectual Property (IP), client/agency
agreements, and remuneration models.
Kathryn consults with multinational and boutique agencies,
helping to communicate and negotiate mutually rewarding
client/agency agreements, with strong emphasis on Return
On Investment (ROI).
With deep industry expertise, in the world of advertising,
public relations, design, marketing, and digital
communications - Kathryn supports business owners to
ensure that they have the best financial brains on their team.
Kathryn provides financial discipline, focus and
support, to deliver top shelf management reporting and
optimum profitability. Driving financial and management
reporting, establishing routine disciplines, specializing in
middle-management grooming, team training, and best
practice industry tools and techniques to deliver:
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MARKUP AND MARGIN
Commercial expertise and business intelligence:
- Financial vision, planning, budgeting and reporting to
achieve your goals;
- Clarifying staff job descriptions, targets and key
performance indicators;
- Pricing, benchmarking, and job profitability; and
- Client contract policies and negotiation skills.
Kathryn delivers clarity and confidence to you and
your team.
“My passion: for you to be
brilliant in all areas of business”
KATHRYN WILLIAMS
Owner, Kathryn’s Mint Pty Ltd
www.kathrynsmint.com.au
Kathryn provides financial discipline, focus
and support, to deliver top shelf management
reporting and optimum profitability.”
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MARKUP AND MARGIN
1
MARKUPS AND MARGINS
ARE DIFFERENT
Markup is the additional amount added to third party costs,
to arrive at the total amount charged on to your client.
Margin is the difference between the cost and the sale.
What is your policy?
Do you quote: Markup? Or margin?
Often these two terms are misunderstood, and the result
can be devastating:
50% markup does not equate to a 50% margin!
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MARKUP AND MARGIN
21
MARGIN - HOW TO
CALCULATE YOUR SELL PRICE
If you have an external cost of $1,000 and your policy is to
achieve a 50% gross margin:
Your calculation is: Divide the $1,000 cost by 0.5 = $2,000
Let’s double check:
Deduct the 1,000 cost from your $2,000 sell price =
$1,000 gross profit divide by the $2,000 sell price = 50%
Profit margin.
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MARKUP - HOW TO CALCULATE
YOUR SELL PRICE
However, if your business has a markup policy of 50% on
external costs, then you would sell the $1,000 item for
$1,500 instead of the $2,000 calculated above.
$1,000 x 1.5 = $1,500 sell price.
To double check:
Deduct the $1,000 cost from the $1,500 sell price =$500
gross profit divide by the $1,500 sell price = 33.33% gross
profit margin.
This is a third of the sell price, and is $500 less than it
should be if we are aiming for a 50% profit margin.
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MARKUP AND MARGIN
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OPPORTUNITY
If we have inadvertently mixed these terms up, and aim for a
50% markup on external costs instead of 50% margin, then
you can see below how serious our mistake might be:
If over the course of a year we outsource $500,000 to
external suppliers, and we seek to make a 50% margin, we
would be expecting to earn $500,000 profit.
However, if we had said that we charge a 50% markup
on external supplies, then we would have only made a
$250,000 profit.
A quarter of a million dollars difference - Is $250,000
significant? Compelling enough to review your policy?
It may be a good time to familiarize yourself with the above
calculations and the resulting impact they make on your
bottom line - review your markup and margin policies.
It may be a good time to familiarize yourself
with the above calculations and the resulting
impact they make on your bottom line.”
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MARKUP AND MARGIN
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HOW MUCH?
It is quite reasonable to implement different levels of markup
or margin for different products or services, for example:
• For your basic services such as administration
supplies (photocopying, stationery etc) a 10%
increase is reasonable.
• If the job is slightly more involved with difficult
negotiations requiring personal attention, then
consider 20%+.
• Your IP, expertise and technical skills required for
negotiations 30%+ or more.
• High-tech and luxury items are often marked up
by 200%+.
Markups and margins are often set based on industry norms,
what the market will bear, and also take into consideration if
you add extra value to the product or service.
It is quite reasonable to implement different
levels of markup or margin for different
products or services.”
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MARKUP AND MARGIN
In the MarComms sector:
• A markup within the range of 15% - 30% would be
considered a good range to be in.
• 15% for standard markup, and 30% for more
specialised value-add contribution.
• Consider a margin policy of 30%, instead of a 30%
markup policy.
Whilst reviewing your markup and margin policy, you
should also consider setting different levels of markup or
margin for the different products or services which your
business offers.
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JUSTIFY YOURSELF
The aim of applying a markup or making a margin is to
charge your client enough to cover the supplier cost plus:
• Your time incurred whilst briefing/negotiating/
arranging/supervising the product/service.
• Your administration costs (phone calls, meetings,
contribution towards general overheads like rent, power
etc) incurred whilst organizing the product/service.
• Your intellectual property (IP), the value of your
knowledge and relationship with that supplier.
Your knowledge of the product or service and your
list of ‘tried and tested’ quality supplier contacts,
along with your distribution database which you have
developed and nurtured over the years - are all of
huge value to a client which possesses none of these.
• Your technical expertise/know-how of the product/
service. The expertise and quality of your product or
service also adds value.
Applying a markup or achieving a margin is
about being fair and equitable.”
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MARKUP AND MARGIN
Your ability to communicate the client’s requirements
to your supplier, supplier-specific lingo and
terminology, along with your intimate knowledge
of your both your client requirements and selected
supplier’s product/service and processes - puts you in
a valuable position of negotiation power.
Those little extras, the personal ‘over and beyond’
bits which you and your team deliver with care which
exceed expectations - all add value and exceptional
extras which would be noticed and appreciated by
your client.
• Time pressure and urgency. In some cases you may
find that your client has engaged you quite late in
the process, or they need you to help get them out
of a pickle. When such pressurized situations arise,
you might consider a higher markup to ‘buy’ your
immediate attention, expert and personal handling of
the job, whilst operating under time pressure urgency.
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MARKUP AND MARGIN
• To earn a profit on providing this service. Industry
norms provide a guide, and are reassessed and
updated every year, generally they average at:
25% of costs - markup method
20% of gross income - margin method
Each business needs to judge for itself what a
comfortable level of profit is for them.
The idea is that your client remunerates and
compensates you for your effort in negotiating the
supply of goods/services on their behalf, because
they don’t have the time, or perhaps they are not
expert in that field.
All best practice businesses apply a markup or margin to
recognize value added. There is no need to be shy, just pick
one, be confident as to how much you are charging, and
why, reflect it in your business terms and conditions, and
consistently apply it.
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MARKUP AND MARGIN
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WHEN TO APPLY?
You should consider the following factors when deciding
when to markup or make a margin on a supplier invoice:
• The bottom line compared to competitor’s prices
• Client relationships
• Supplier relationships
• Commercial ethics
• Competitive edge
• Benchmarks
There is no point pricing yourself out of the market by
applying too high a margin or markup.
If you clients are not pushing back and there is no negative
repercussion - you should assume that your price is within
the acceptable range, and could perhaps even tolerate a
slight increase.
The classic tip here is: If you don’t ask, you don’t get.
Applying a markup or achieving a margin is about being fair
and equitable.
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MARKUP AND MARGIN
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DISCLOSURE
Clarity brings confidence.
Given that your markup or margin policy is rarely
articulated or detailed in quote by quote day to day
activities, then now is as good a time as any to review your
preference and reasons for your decision, and implement a
change if advantageous.
Double check your business terms and conditions
contracts and agreements to ensure that you have formally
communicated your policy to your client.
Tip: In an ‘agency’ environment where the legal relationship
is one of ‘principal’ and ‘agent’– 3rd party charges, markup
or margins are not generally disclosed. However, you should
always feel comfortable about marking up or charging a
margin on your 3rd party costs, be able to justify the amount,
and be happy to be transparent with your clients.
now is as good a time as any to review your
preference and reasons for your decision, and
implement a change if advantageous.”
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MARKUP AND MARGIN
WHAT’S NEXT?
Now that you have taken the time to read about markup
and margin and considered your stand point, it’s time to
take action:
1. Review your markup and margin policy.
2. Refer to industry benchmarks and guidelines.
3. Clarify and formalize your position.
4. Update your software programs and cost
matrix menus.
5. Communicate and inform your staff.
For more tips and techniques - ask Kathryn, visit the
Kathryn’s Mint website, and peruse Kathryn’s blog posts.
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B
usiness owners call on Kathryn to be their
financial confidant, financial mentor, and
agency financial director.
Secure Kathryn under retainer or on an ad-hoc
project basis to provide financial and management
reporting, routine discipline, middle-management
grooming and support, training and stretching your
team to take on financial responsibilities to help
run the business as if it was their own.
In a nutshell, Kathryn’s Mint offers
• Commercial expertise and business intelligence.
• Financial vision, planning, budgeting and
accountability to achieve your goals.
• Design and facilitatation of monthly
management reporting routines.
• Staff grooming in finance responsibilities, for
career progression and succession planning
• Pricing review, benchmarking, and job
profitability reporting.
www.kathrynsmint.com.au