In retail business these are the 3 most common terms we hear every day, but what do they all mean and how are they different from each other, is a question many of you have. I know this because I get email time to time about this very topic.
Okay let’s break them down and see what they are:
Penny profit is essentially the actual cash profit you make by selling any items in your store. For example, say you just sold a bottle of 20 oz Coke $1.75, what is the penny profit of that sale? To find the answer first we need to see how much you paid to buy that bottle of Coke. Looking at your invoice from Coke shows you paid $1.00 for that bottle of coke and you sold it for $1.75. So your penny profit is $1.75-1.00 = 75 cents. Penny profit is the difference between the selling price- actual cost.
Profit margin the term most widely used and understood in most every business as it is what we all use to figure out if we are making enough profit from our businesses by selling the products and services.
Profit margin is essentially the percentage of profit you make or earn when you sell a product. Confusing? Let’s take a look at the same example of that bottle of coke we just used earlier. We already know the penny profit from that sale was 75 cents. Now the profit margin is done little differently, to find out the exact margin we will have to take the penny profit and divide that number with the selling price. So it will be $1.75-$1.00=0.75, then we divide that penny profit by the selling price 0.75/$1.75 = 43% profit margin.
Markup on the other hand is somewhat similar to profit margin, but instead of dividing the penny profit by the selling price you would have to divide the penny profit by the actual cost. Let’s take a look at the same example once again.
Remember our penny profit from that bottle ok Coke? It was 75 cents, now we just need to divide that by the actual cost which was a $1.00 right? Let’s do this, 0.75/$1.00 = 75% Markup for that same bottle of Coke.
Let’s now look at another example so you will get a clear picture between the penny profits, profit margin and mark up as they can be confusing at times.
Let’s say you bought a candy bar for a $1.00 and sold it for $2.00
Penny profit is: Selling price – Cost = Penny profit. $2.00-$1.00=$1.00
Profit Margin is Penny profit/selling price = Profit margin. $1.00/$2.00=50% profit margin
Markup is Penny profit/Cost=Penny profit. $1.00/41.00=100% mark up
In this case you can see the profit margin is only 50% when the mark up is 100% which is double in this scenario.
Remember to use Profit margin when calculating your business profit margin and not to use markup.
Here are some examples of profit margin vs. markup.
20% Markup = 16.7% Gross Profit 25% Markup = 20.0% Gross Profit 33.3% Markup = 25.0% Gross Profit 40% Markup = 28.6% Gross Profit 50% Markup = 33.0% Gross Profit 75% Markup = 42.9% Gross Profit 100% Markup = 50.0% Gross Profit
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