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If you don't understand the difference between Markup and Margin, you have almost no chance of making good money as a renovation contractor.

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

Any employee that is involved in pricing of retail or labour sales for my company are made well aware of the difference. ‘Markup’ is a term not allowed in our office.

Years ago, I was hired to manage a retail marine store. My boss could not understand year after year of losses, He would markup all his new spring inventory 35 to 50%, and in the fall reduce all remaining stock by the same discount to clear the shelves of unwanted stock. (it all sold!)

Do the math…. Item cost $100 marked up 35% equals $135 retail. Give a 35% discount and the sale price is (135-35%) =$87.75……He lost $12.25 on that one alone.

If you need to Margin 40%, simply divide by the reciprocal of 100. ie: divide the cost by .60.

eg: Cost is 100 divided by .60 = $166.67. That is a 40% margin. 166.67 minus 40% = 100. NO LOSS in that case, but also no profit.

10% margin, divide by .90.

27% margin, divide by .73.

50% margin, divide by .50.

Try this several times if until you are comfortable.

Tip: Never use markup, don’t use the word, don’t use the math, it’s poison!

Further, if you give a 10% discount, calculate the new gross margin.

166.67 minus 10% = $150.00. 150 minus cost 100 = 50.

50 divided by 150 = 33.33% margin.

Lastly, ever wonder how retail stores can sell at 50% off and stay open? Well ,window blinds for example are margined by 55 / 40 (or some other combination) to achieve the suggested list in the catalogue.

eg. Cost 100 margined at 55 and then at 40 = 370.37 minus 50% = 185.18. That is a gross profit of $85.18 or 46%.

Dave, loved your comment that “Markup is a term not allowed in our office.” (Friend of mine worked in a radio station. You weren’t allowed to swear, anywhere on the premises, not even in the front reception far from any microphones. It was a mindset the station management wanted to instill.)

Think margin, everyone. And remember that Gross Margin is what you have when all the costs of running your business are ignored. You can’t ignore them, either.