Margin versus Markup: One more time on this critical lesson

My post three weeks ago about the difference between Margin and Markup led some readers to ask for more information and further examples.

This topic is so important – in fact, it’s critical – that I thought I should repeat it in this week’s post.

First of all, how much overhead do you need, and how much profit, as a renovation contractor?

Only you can decide how much money you need to make. But I can tell what is NOT enough: “10 plus 10” (10 per cent on top of costs for overhead and 10 per cent for profit).

10 per cent overhead is never enough. Overhead includes such items as cellphone, all your insurance, workers comp, depreciation or lease costs for all vehicles, fuel, machinery and tools, computers, bookkeeping, accountant, lawyers’ fees, office rent (even if you work out of your house), office supplies, internet, and on and on.

Overheads can add up to 25 per cent to your costs, not just 10 per cent. Add all those things up yourself, and see how much they really are.

As for profit, at Renovantage we believe a 15 per cent profit is attainable and realistic.

In another comment on my post, a reader asked how 43 per cent markup only leads to a 30 per cent margin.

Here it is again:

If the project cost you $7,000 and you mark it up by 43% (or multiply it by 1.43), you will sell the project for $10,000.

That means your gross profit is $3,000.

Your gross profit percentage is therefore $3,000 divided by your total revenue of $10,000, which equals 30 per cent.

So if you mark something UP by 43 per cent, you only get 30 per cent profit.

Not understanding this principle is the single biggest reason that small business people don’t make enough money. They underestimate their need for markup, thereby shrinking their margins.

Here is a chart showing the difference between markup and margin.

Margin                Markup Required

(%)                         (multiply your costs by)

10                           1.11

15                            1.17

20                            1.25

25                            1.33

30                            1.43

35                            1.54

40                            1.67

45                            1.82

50                            2.00

60                            2.50

70                            3.33

80                            5.00

90                            10.00