Editor’s note: This is part of my ongoing series on sales math.
Margins and Markups are related, but only as far distant cousins. As I work with sale people, I find many, if not most, do not understand the difference between markups and margins.
Most of my conversations with sales people and sales managers, revolve around the fact that multiplying by 1.4 does not constitute a 40% margin, only a 40% markup. Two very different numbers in the sales world.
Most companies I’ve worked for have target gross margin numbers for their business. These are shared with sales, but rarely is there more explanation than that. The companies make an assumption the sales people know what the numbers mean and never go over the details in their training program.
Here is a quick chart I put together to show the difference between the two.
As you can see, on the same amount of dollars, the difference between margin and markup selling price grows as the numbers increase.
If you carry this out to a total monthly sales of $50,000 at a 40% margin or 40% markup, and calculate a 15% commission, the difference is significant. With $20,000 profit from the 40% markup, the commission is $3000. With a 40% margin, the commission is $4999.99, a paycheck of nearly $2000 more.
The point of this is to show you how much money it takes out of your pocket when you think you are working with a 40% margin only to discover it is a 40% markup.
It also shows how much less in profit the company makes. In the $50,000 cost example, the company made $13,000 less with the markup number. This can affect pay raises, capital investments, and bonuses at the end of the year.