As a business owner, it’s easy to get caught up in the day-to-day operations and forget about the numbers that drive your success.
Recently, I had a conversation with a guest on the Start Scale Succeed podcast that highlighted a common issue many entrepreneurs face: neglecting to review and adjust their pricing strategy.
Before we even started recording, my guest confessed that she hadn’t revisited her cost prices and retail prices for an entire year. Meanwhile, her suppliers had been steadily increasing the costs of raw materials.
This oversight led to a startling realisation, she was massively underpricing her garments and needed to make significant changes to maintain profitability.
This situation isn’t uncommon. Many business owners tend to “stick their head in the sand” when it comes to financial matters, often leaving them as the last item on their to-do list. However, this approach can be detrimental to your business’s health and growth.
So before I get into the difference between profit margin and mark up and what you should be aiming for depending on your business model. I want you to think of this as a public service announcement.
Double-check your costs with you suppliers if you are repeating the same items throughout the year or for the next season.
There have been increases in oil and other natural raw materials which may have a knock on effect for your margins. So Let’s get to it…
What is the difference between profit margin and mark-up?
Margin is the percentage profit you make in your business after your cost of goods have been deducted from your sale price
Simply put Margin is the percentage of the selling price that is profit
Check out the below example of how to work it out.
Markup is the increase you add to the cost price of a product to determine its selling price. It ensures you cover costs and make a profit.
Mark up is the increase from the cost price to the selling price, which can be shown as a percentage or as a multiplier. I’ve usually seen it as a multiplier and what I’ve seen is more commonly used with retail/wholesale but I’ll show you how to work out both ways
So what is your ideal % profit margin & mark-up
Well It varies on your business model, for example, if you wholesale your products or use distributors you’ll need a 70%-80% profit margin. More people need a piece of the pie and your retailers will want anything between a 2.1 and a 2.8 mark-up
But if you’ve got between 50-60% profit margin in a purely DTC (direct-to-consumer )model then that is a healthy margin.
You may not start off with a 50% margin but this is definitely where you should be aiming for in the first instance to ensure your business can grow and cover your costs as you scale.
I’ve had clients who have started their business with products that had a 35% margin but I’ve helped them relook at their model, costings and supply base to secure more profit in their business.
If you need help resourcing products or need support to help increase your profit margins then book a call to see how we can work together.
I hope that this post helps you to continue on your journey to success and if you need any extra support then check out my free resources on my website, follow me on Instagram, subscribe to my monthly newsletter or get in touch at nicole@thebuyerandretailcoach.com
