As a refresher, a product’s profit margin tells you how much the product sells for above the actual cost of the product itself. Put another way, it reveals how much of the selling price is “markup.” This invaluable metric determines which products in a company’s line are bringing in the most revenue relative to their cost.
Now it’s time to get to the Nuts & Bolts of your product and service to make sure you are enjoying the BEST margin(s) possible.
On Your Mark…
This explanation is fairly high-level and expects you to understand fundamental math. However, I will explain some of the concepts and cover Selling Price, Mark-up Percentage, Gross Margin Percentage, and Selling Price Margin, which are the sales formulas for businesses.
We need to go through a very simplistic explanation on pricing. In retail psychological pricing is a strategy that says consumers assume odd or un-rounded prices are perceived lower than they actually are. Wal-Mart uses this strategy extremely well.
An Example of this would be $1.99 or $1.98 is perceived as $1.00 and not $2.00. A simple rounding mistake, unless you are talking about $49,999 and the rounding mistakes is $1,000.
If this pricing tactic takes some getting used to, just practice rounding up. Psychological pricing is one type of strategy that you can follow.
Others are price skimming, price discrimination and yield management, price points, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing all of which are demand-driven strategies.
For calculation examples, I am going to use a psychological selling price of $1.99
My cost price / purchase price / buy price is going to be $1.40
If we know our cost, and selling price, and we want to know the mark-up percentage, here is the formula.
If we don’t have the selling price, but we know the selling price, and have a 42% mark up:
For this step we need to keep in mind that 42% can also be written as 0.42.
Gross Margin Percent
Changing the Mark-up Percentage calculation slightly to the Gross Margin Percent calculation:
Selling Price Margin
If you have a margin requirement of 30% apply this formula to your pricing:
We’ve gone through the basic pricing calculations for Markup and Margin and looked at both cost + markup/margin and cost and selling to calculate markup/margin perspectives.
Attached, you will find an Excel template for Markup and Profit Margins to calculate your selling price.
The formulas are built in and you can change several parameters. However, if you click on a cell that shows you a formula… Do not change the formula; change the parameters of the other cells.
Finally, I recommend that you make a copy of the spreadsheet so you will always have a clean copy on file.
Get on it, be brilliant and take your time!