What’s the difference between margins and mark-ups? Which do you use, and when?
Simply stated if you’re a packaged food/taxable grocery brand, you should use margin, not mark up.
Why? Because that’s what stores, and distributors and brokers and wholesale buyers use. You need to be speaking their language, because when a business analyzes their financial statements, all income and expenses are expressed as a percentage of sales.
As has been noted, you want to speak the same language as stores and distribution channels.
Margin and markup are not interchangeable. Not the same thing. Won’t ever lead to the same cost, price.
Another key point, when you’re in a meeting with a buyer and you hear them use the word “markup”, ask what they mean. Ask: “Do you mean mark up or margin?”. In brief, it’s critical to be on the same page about how they’re going to price your product.
Margin is the retailers profit dollars expressed as a percent of the retail selling price. In other words, a percentage of the price you see on shelves.
Margin = profit $ / retail price.
Markup = profit $ expressed as a percentage of the wholesale price (price they paid you, the vendor)
Markup = Profit $/wholesale price.
To illustrate: retailer buys your product for $5, and they sell it for $8.50.
Retail price $8.50
Your price to them is $5.
Profit on the sale is $3.50.
Margin: profit $/retail price. In this case, $3.50/$8.50 = 41%
What margins are buyers looking for? That depends on your category (e.g., snack foods, beverage, canned goods) and channel (retail, DTC, eCommerce.)
Markup: profit $/wholesale price $3.50/$5.00 = 70%
In this arrangement, retailer gets a 70% markup. It’s the same as the 41% margin.
Ask: How did they arrive a selling price of $8.50?
As can be seen, in either scenario, you’ve still sold the product at $5.
Here’s a free, easy margin calculator for your browser.
In fact, there’s an app to calculate margin on the fly.
Easy peasy, right? As a matter of fact, if you want to compute margins along with your COGS, Crafted Kitchen has a nifty calculator as well as a free eBook titled “Pricing Fundamentals for Food Entrepreneurs”. It’s free! Check it out!
Want to talk about your small food business? We’re all ears! Schedule a call today. Interested in renting flexible commercial kitchen space in Los Angeles? We, in fact, do that!
Crafted Kitchen is a shared use commercial kitchen in the Arts District of Los Angeles. We offer flexible kitchen rentals to small food businesses. Rent a kitchen today!
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