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The Difference Between Mark Up and Gross Margin and Why Doing it Wrong is Costing you Money
Good morning! Jon here with today’s Toolbox tip and today I want to talk about difference between “Markup’ and ‘Gross Margin.’
I see lots of people doing it wrong and I’m here to say if you’re doing it wrong or calculating it incorrectly, you’re costing yourself money – you’re leaving money on the table instead of putting it in your pocket where it should be.
I’m Jon Dale. I’m from Small Fish Business Coaching. I run the Tradies Toolbox Coaching program for the owners of trades businesses who want to grow and want to be more profitable.
Now lots of tradies talk about margin.
“I add a margin, I add a 15% margin to the other trades” or “I add a 20% margin to materials and labour.”
But actually what they calculate is mark up and when you do that, you’re costing yourself money. Let me explain why.
Okay, the point of today’s video is, ‘Mark up bad, Gross Margin good’ and also the right way to calculate it. Let me show you with the aid of this excellent diagram I prepared earlier.
Calculating markup (which is what some people are calling margin)
You calculate a percentage of your costs and you add it to your costs to make a sale price.
When you calculate Gross Margin:
You take the same percentage but it’s a percentage of the total sale price which of course is more. It’s a bigger number so you get more and you make more money. The total sale price is a bit more expensive and your margin is a bit more.
A bit more money for you, more profit, and more margin in the job for you to take home. And most of your customers have happily agreed