Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
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The facts of life
Explaining Markup and Margins
Introduction
Half the art of selling, is the art of pricing. Know the market and discern the
customer.
These are things of intuition and experience, what price is fair for this customer,
and what price will the market bear?
In order to do this efficiently, you need to be confident that the price you're selling
for is profitable. Not only that, you must be able to quickly navigate through the
forest of supplier discounts, list prices, VAT, and acceptable margins.
Two terms used when discussing prices are markup and margin. They are different
ways of calculating profit, and the difference can be confusing.
This article explains the difference between markup and margin, and equips you to
easily calculate prices and profits in whatever situation you find yourself.
Percentages
Many retail (Veterinary) establishments do their calculations based on markups.
This is not the same thing as margin. This is often a source of confusion - but only
because percentages are difficult until you understand them.
Margin
The percentage margin is the percentage of the final selling price that is
profit.
Markup
A markup is what percentage of the cost price you add on to get the selling
price.
These are different, a selling price with a margin of 25% results in more profit than
a selling price with a markup of 25%.
In a Veterinary situation it is probably better to work with margins. This means
you can know what percentage of our total income is profit.
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This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
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Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
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I’ll ask again … Is there an actual difference?
Absolutely. More and more in today’s environment, these two terms are being used
interchangeably to mean gross margin, but that misunderstanding may be the
menace of the bottom line. Markup and profit are not the same! Also, the
accounting for margin vs. mark-up are different!
A clear understanding and application of the two within a pricing model can have a
drastic impact on the bottom line.
Another way of looking at it that you may like more than the way that I’ve described
it above…
markup percentage is the percentage difference between the actual cost and
the selling price,
while gross margin percentage is the percentage difference between the
selling price and the profit.
So, who rules when seeking effective ways to optimize profitability?.
Many mistakenly believe that if a product or service is marked up, say 25%, the
result will be a 25% gross margin on the income statement. However, a 25%
markup rate produces a gross margin percentage of only 20%.
With margins, a 50% margin means that half the selling price is profit. In markups,
that is a 100% markup (you have added 100% of the cost price to make the selling
price). With margins, a 100% margin is only possible if the cost price is zero.
To understand why margins are higher, imagine an item that costs fifty pounds. If
you sell it with a margin of 50% - that means fifty percent of the selling price should
be profit. If you sell it at 100 pounds, half the selling price is profit - margin 50%.
If you sell the same item (cost fifty pounds) with a markup of fifty percent, you add
fifty percent of the cost price. Fifty percent of the cost price is twenty-five pounds.
This makes the total selling price seventy-five pounds.
A fifty percent margin is higher than a fifty percent markup.
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How to Calculate Margins
You will often have to calculate margins; either to work out a selling price from a
cost price or to work out what margin a certain selling price would result in.
Selling Price from Cost Price
The full formula for working out a selling price from a cost price and a certain
margin is :
selling = cost/((100-margin)/100)
Thankfully there is a quicker way to work it out.
For a five percent margin, divide the cost price by 0.95.
For a ten percent margin, divide the cost price by 0.9.
For a fifteen percent margin, divide the cost price by 0.85.
For a twenty percent margin, divide the cost price by 0.8.
For a twenty-five percent margin, divide the cost price by 0.75.
For a thirty percent margin, divide the cost price by 0.7.
Hopefully you can see the pattern.
Margin from Cost and Selling Prices
Sometimes you will have a cost and selling price, and need to know what margin
that results in. The formula is :
margin = (1 - (cost/selling))x100
If cost/selling is 0.95, the margin is five percent.
If cost/selling is 0.9, the margin is ten percent.
If cost/selling is 0.85, the margin is fifteen percent.
If cost/selling is 0.8, the margin is twenty percent.
etc...
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For more information: [email protected] phone (+61) (0) 408-793337
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Discounts from List Price
Many suppliers prefer to quote list prices less a discount. In these circumstances it
is useful to be able to quote customers a discount off list. They love the idea that
they are getting a discount.
To work out the nett. cost price (what we pay) from a list less discount, use the
following formula :
cost = list * ((100 - discount)/100)
Working out what discount to quote customers, whilst still maintaining an
acceptable margin, can be fiddly.
You can work it out as follows. final discount is the discount to offer the customer,
supplier discount is the percentage off list price you have been offered, list is the list
price and margin is the margin you want to make as a percentage.
cost = list * ((100 - supplier discount)/100)
selling = cost/((100-margin)/100)
final discount = (1 - cost/selling) * 100
It can actually be easier to guess a few times though. Work out the cost price. Then
work out the selling price if you offer (for example) forty percent off list - and see
what margin that leaves you with. If it is too little, try reducing the discount you offer
- or vice versa.
Another perspective…..
Markup vs. Gross Margin; Which is Preferable?
Though markup is often used by operations or sales departments to set prices it
often overstates the profitability of the transaction.
Mathematically markup is always a larger number when compared to the
gross margin.
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Turbo-Charge Your Veterinary Practice System
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and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
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Consequently, non-financial individuals think they are obtaining a larger profit than
is often the case. By calculating sales prices in gross margin terms they can
compare the profitability of that transaction to the economics of the financial
statements.
Steps to minimize Markup vs. Margin mistakes
Terminology and calculations aside, it is very important to remember that there are
more factors that affect the selling price than merely cost. What the market will
bear, or what the customer is willing to pay, will ultimately impact the selling price.
The key is to find the price that optimizes profits while maintaining a competitive
advantage. Below are steps you can take to avoid confusion when working with
markup rates vs. margin rates:
- use a pricing model or pricing tool to quote sales. Have the tool calculate both the
markup percentage and the gross margin percentage
- relate gross margin percentage per sales invoice to income statement
- organize your chart of accounts to compare gross margin rate to sales quotes
- educate your Team on the differences. By targeting the gross margin percentage
vs. the markup percentage you can throw an additional 2 - 3 percent profit to the
bottom line!
Margin vs. Markup Chart (and see below)
15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit
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This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
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Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
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But the main message might be this (a practical
example).
It is not profitable to sell pet food at less than a 30% margin.
And then are we really looking to make a profit on ‘THIS’ sale – or is the client
coming in our door on a regular basis more important.
I’ll leave you to ponder ….
I know - there are collective gasps from the readers….
We all realise that the RRP for all the Hills Diet and Science food gives us a margin
much less than 30%.
Do we ask this question – do we mark up to greater than those of the RRP for Hills
and Science Diets (for example)?
Could you for example use a markup of between 50% and 55% on all ‘special vet’
diet foods, and for the common puppy and kitten foods use the markup to 40%.
A markup of 50% gives a margin of 33% - this could be used for the specialist food
that involves a lot of handling with low sales volume
A markup of 40% gives a margin of 29% - so this is the very minimum we should
allow - ???? I’m simply raising a question here for you to think about!
A markup of 30% gives a margin of 23% which is typical of RRPs
A COMMON ‘GOTCHA’ WHEN CALCULATING MARGINS
AND MARKUPS
The buy price is ex GST, while the RRP is inc. GST, so if you use those 2 numbers
to calculate your margin it will be falsely inflated.
You need to divide the sell Price inc. GST to get the Sell Price ex. GST, and use
those 2 figures for your calculations.
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This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
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For more information: [email protected] phone (+61) (0) 408-793337
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ROYAL CANIN RPPs
Their markups are 33%, and their margins are 25%
Retail Margin And Markup Table
This table is designed to assist in converting the different methods of arriving at a
retail price.
Use the multiplier on cost to achieve the desired margin.
For example, to achieve a 33.33% margin use a 150% (1.50) multiplier. Another
way to express the difference is that a markup percentage of 50% only yields a
margin percentage of 33.33%. Markup, defined as the percentage added to cost to
arrive at a selling price, is commonly used to price materials. If you want to mark up
an item 20%, you add 20% of the item's cost to the cost. However, as we have
demonstrated, a 50% markup does NOT yield a 50% margin! It is important that
you utilize margin and markup properly. Here are the formulae that should help:
Margin
If the cost for an item is $500 and you want a 30% margin:
$500 / (100%-30%)
$500 / (70%)
$500 / .70 = $714.29
COST / (100%-GM%) = SELLING PRICE
A variation taught by many accountants is to also include what is known as base
overhead factor (BOF). That ranges from 1.25% to 5%. The same margin with the
BOF method, in this case 5%, would be as follows:
$500 / (100%-30%-5%)
$500 / (65%)
$500 / .65 = $769.23
COST / (100%-GM%-BOF%) = SELLING PRICE
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This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
____________________________________________________________________________
In the Margin example above, do NOT make the common error of multiplying by
.70! In this case that would yield a selling price of $850.00; nice if you can get it
honestly but the greatest probability is that a competitor would undercut your bid at
the same (anticipated) margin!
Markup
If an item cost $500 and you want to add a 20% markup:
500 X 20% = $10
$500 + $100 = $600 SELLING PRICE
The actual margin on this item is less than 20%.
($600 - 500) / $600 = 16.67%
(RETAIL - COST) / RETAIL
MARKUP PERCENTAGE MARGIN PERCENTAGE MULTIPLIER PERCENTAGE
20
16.67%
120
21
17.36%
121
22
18.03%
122
23
18.70%
123
24
19.35%
124
25
20.00%
125
26
20.63%
126
27
21.26%
127
28
21.88%
128
29
22.48%
129
30
23.08%
130
31
23.66%
131
32
24.24%
132
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Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
____________________________________________________________________________
33
24.81%
133
34
25.37%
134
35
25.93%
135
36
26.47%
136
37
27.01%
137
38
27.54%
138
39
28.06%
139
40
28.57%
140
41
29.08%
141
42
29.58%
142
43
30.07%
143
44
30.56%
144
45
31.03%
145
46
31.51%
146
47
31.97%
147
48
32.43%
148
49
32.89%
149
50
33.33%
150
51
33.77%
151
52
34.21%
152
53
34.64%
153
54
35.06%
154
55
35.48%
155
56
35.90%
156
_____________________________________________________________________________________
This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
____________________________________________________________________________
57
36.31%
157
58
36.71%
158
59
37.11%
159
60
37.50%
160
61
37.89%
161
62
38.27%
162
63
38.65%
163
64
39.02%
164
65
39.39%
165
66
39.76%
166
67
40.12%
167
68
40.48%
168
69
40.83%
169
70
41.18%
170
71
41.52%
171
72
41.86%
172
73
42.20%
173
74
42.53%
174
75
42.86%
175
_____________________________________________________________________________________
This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
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Resource Box
The sales and profit generating information you are presently reading has been taken from the
Turbo Charge Your Veterinary Practice System as developed by international veterinary
business coach, seminar speaker and hands-on consultant Dr Diederik Gelderman.
Dick or DG as he is also known is a former Australian ‘Vet Of The Year’ and he most certainly
can “walk the talk” having transformed a struggling one man practice into an international
industry leader.
Today his systems, advice and workshops have literally transformed thousands of practices
worldwide as measured by the one common denominator that is universal and meaningful to
the veterinary practitioner...massive EXTRA profits as measured in cash!
If you are a practitioner who is fed up with ordinary results and who is ready for dynamic
change...then take the first step right now and contact Dick direct for an obligation free
discussion of possibilities.
If you would like to distribute Dicks massive range of profit generating practice developing
information and systems, he’d also be keen to hear from you.
But, act now....email him on [email protected] or phone him on +61 (4)
08793337.
All information as contained is heavily protected by international copyright. Written permission is required
for any ancillary use.
_____________________________________________________________________________________
This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
Copyright ©Diederik Gelderman 2010 (no copies permitted without permission)
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For more information: [email protected] phone (+61) (0) 408-793337
Turbo-Charge Your Veterinary Practice System
Marketing
Our Purpose: To help professionals improve and grow their business by implementing proven, powerful, practical
and simple to apply strategies, techniques, tools and tips which give immediate results to the owners.
____________________________________________________________________________
Where The Rubber Hits The Road
When you do more than just find this article interesting – when you do
something about it and TAKE ACTION.
When are YOU going to take action …..?
Document EXACTLY what you intend to do, WHO is going to do it and By When
WHAT
WHO
BY WHEN
Priority #
Priority #
Priority #
Priority #
Priority #
Priority #
Priority #
Priority #
Priority #
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This Information is fully copyright and is part of the Turbo-Charge Your Veterinary Practice System
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For more information: [email protected] phone (+61) (0) 408-793337