Impressions - Build Your Business 2024 - 26

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An In-Depth Guide to
Markups and Margins
By Anbin Muniandy,
Contributing Writer
A
s any veteran decorator will tell you, while the craft of decorating-whether
it be embroidery, screen printing, heat
pressing or digital decorating-is critical to professional
success, it's only part of the equation. Just as important is getting a
handle on the business side of things. Th is includes everything from
marketing and logistics to budgeting, accounting and assessing your
cost of goods sold.
In this article, adapted from a post originally published online by
Anbin Muniandy, CEO and principal engineer the online business
management company YoPrint, the author unpacks the nuts and bolts
of determining product markups and margins so you can make substantial
profi ts to boost your print shop's fi nances.
Ultimately, it's impossible to run a successful business-or even
know how you're doing in the short term-without getting a handle
on the " numbers " involved, not the least of which is the amount you're
charging for the products you're setting.
Profi tability and Markups
For all the complexity that goes into running a successful business, even
a relatively small one, the formula for profi t is a surprisingly simple one:
price - cost = profi t.
With that as a starting point, the question becomes, " How can you
price your products for profi tability? " To answer this question, let's look
at two common pricing strategies: markups and margins.
With respect to the fi rst, markup is the diff erence between price
and cost. In other words, markup is your profi t. Let's say Jane runs a
screen-printing business. Buying, printing and preparing a shirt for
sale costs $20.00. Jane wants to make a profi t of $10.00. Jane therefore
" marks up " the T-shirt by $10.00, which brings the product price to
$30.00. Markup is $10.
Related to a product's markup is something called " markup percentage, "
or the profi t-to-cost ratio. Often, when someone is talking about
markup, they are referring to markup percentage. To determine markup
percentage, subtract the cost of creating the product from the price,
then divide the result (or " diff erence " to use the correct mathematical
term) by the cost. Th e result will be a decimal number. To convert to a
26
percentage, multiply by 100. Here is the formula written mathematically:
(price - cost) / cost = markup
Going back to Jane. Her cost is $20.00, and her price is $30.00.
Th erefore ($30.00 - $20.00)/$20.00 = 0.50. Multiple that by 100, and
you get 50 percent.
Once you have determined your markup percentage, you can generate
the price for other products or the same product in the event your costs
change by using the formula: cost + (cost x markup) = price.
Let's say, Jane's cost for the product above goes up by $5.00 yearover-year,
and Jane wants to increase her price to maintain the same
markup, or profi tability level. She can do so by using her current markup
percentage to generate the new price.
Doing the math, if her cost increases by $5.00, that brings her total cost
to $25.00. Her new price for the product in question should therefore
be $25 plus $25 times 0.5 (or $12.5), which results in a price of $37.50.
Represented mathematically we have: $25.00 + ($25.00 x 0.5) = $37.50.
Moving up to Margin
Related to, but diff erent from markup is something called " margin "
(short for " gross profi t margin " ). Margin is also known as the profit-to-price
ratio. To determine margin, subtract the cost of a product
from its price, then divide the resulting diff erence by the price. Here
is the formula: (price - cost)/price = margin.
Using Jane again as an example, the product's cost is $20, and the
sales price is $30. To determine the margin, you subtract $20 from
$30, then divide the result by $30. Th is gives you a margin of 0.3333.
Multiplying by 100 you get 33.33 percent. Put another way, Jane
makes 33 cents for every dollar earned. Th is is a key insight! Represented
mathematically: $30 - $20/$30 = 0.33; 0.33 x 100 = 33 percent.
As is the case with markup, you can use margin to calculate the price
of other items in your product line or the same product in the event of
increased costs. To do so divide the existing cost of the product by the
number one minus the margin in its decimal form, per the following
formula: cost/(1 - margin) = price.
Going back to Jane, we know Jane's current margin is 33 percent.
We also know Jane's cost for producing the product in question is in
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