As Account Managers we will often be faced with accountant's jargon that we will have to both understand and action. Two of the jargonese that can be profusely confusing are "margin" (a.k.a. "profit margin" or "gross profit") and "mark up". Although these two terms are used to express different things, they are also two different ways of analysing the cost and profit of a product or service in your agency. Let's learn what they mean, how the terms differ and when to use them.
Definition: the amount added to the cost price of goods or services to cover overheads and profit, and to arrive at the selling price.
When we price up a job for a client, the component costs will generally fall into two categories:
INTERNAL services (such as graphic design time, strategy, project management and copywriting), which are usually charged from agency to client on an hourly rate.
EXTERNAL goods or services (such as print purchasing, web hosting and photography), which are charged by an outside supplier to your agency, and which you then on-sell to your client. It is common practise for an agency to add a "mark up" to these types of external costs.
The mark up covers the financial risk your agency is assuming in purchasing the product or service on behalf of your client. It also covers your time, expertise, connections and supplier credit accounts necessary to procure the product or service.
Mark ups are usually specified as a % of the total cost. When considering what % increase to make you'll be thinking about 1) what mark up you can "get away with"; 2) what total cost your client will accept; and 3) what is fair and reasonable.
For example: 30% is probably the top end of an acceptable print mark up for most print jobs. On a large/pricey print job 30% may be simply too much, however on a small job you may be able to go to a higher percentage.
Be careful marking up products or services where the price is widely known (e.g. domain name purchases), or known to your client. If you can, even a 10% mark up is better than none.
Say you bought some envelopes for your client for $50 and could on-sell them for $70.
In this case your mark up would be:
((sell price-cost price)/cost price) x 100
($70 minus $50) = $20 (difference)
$20 (difference) divided by $50 (cost price) x 100 = 40%
Your mark up was then 40%
you pre-determine that you could put a 40% mark up on the envelopes.
Therefore your calculation would be:
$50 (cost price) x 0.4 (40%) = $20
$50 (cost) + $20 (mark up) = $70 (sell price)
Definition: The percentage margin is the
percentage of the final selling price that is profit.
You will often have to calculate margins. Either to work out a selling price from a cost price, or to work out what margin a certain selling price would result in. For example, your agency may give you a directive to achieve a 30% margin (or 30% gross profit) on every job. You will need to know how to work out the sums to ensure you are hitting your targets.
The formula for working out a sell price from a cost price and a certain margin is:
sell = cost/((100-margin)/100)
If cost price = $50, and you'd like to make a 30% margin, then sell $ =
100-30 = 70
70/100 = 0.7
50/0.7 = 71.4
Your sell price will be $71.43
Thankfully there is a quicker way to work it out.
For a 5% margin, divide the cost price by 0.95
For a 10% margin, divide the cost price by 0.9
For a 15% margin, divide the cost price by 0.85
For a 20% margin, divide the cost price by 0.8
For a 25% margin, divide the cost price by 0.75
For a 30% margin, divide the cost price by 0.7
Hopefully you can see the pattern
Sometimes you'll have a cost and selling price, and need to know what margin that results in. The formula is:
margin = (1 - (cost/sell)) x 100
If cost price = $50 and sell price = $70, then margin =
(1 - 0.714) = 0.714
1 - 0.714 = 0.285
0.285 x 100 = 28.5
Your margin was then 28.5%
Notice that the percentage for the mark up is different from the percentage for the margin. It is easy to think that your mark up is the profit margin, and you could feel quite disappointed when your accountant gives you the GP (gross profit) figures and your percentage is lower than what you thought.
It helps to remember that the major difference is:
mark up is your profit as a percentage of the cost price and
(profit) margin is your profit as a percentage of your selling price.
Also handy to remember is that the "profit margin" (as calculated in this exercise) is actually GROSS PROFIT. In order to find out how much money your department or agency is actually making, you would need to calculate NET PROFIT, which is simply the gross profit minus what it cost you apart from the cost price to produce that revenue (your expenses). Agency costs (such as rent, utilities, travel, telephone, advertising costs, etc.) are deducted, so you know how much money you actually made in the end.
Sale minus cost of goods = gross profit
Gross profit minus overheads = net profit
These gross and net figures may be supplied, to you, via your Accounts person, and could arrive literally weeks after the job is finished. It pays to make your smart calculations at the beginning of your project, to avoid being questioned about your percentages at the end!
The website Calculator Soup offers a number of different calculators by which you can easily work out:
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