What Are the Benefits of Using Margin in Pricing?
Do you know your gross margin? What about your profit margin? Your company’s margin indicates whether it is profitable or not. A company can have an extraordinary volume of sales, but without the proper gross margin built into the economics of the company, it results in an unprofitable business.
The profit margin is the amount that sales (revenue) exceeds costs. So if your profit margin is low, then it may mean that you are making little to no money at all. Setting the correct price on a product or service is the key to profitability. You want it high enough for you to make money, but low enough for products and services to still sell.
Margin vs Markup
It is easy to interchange and confuse both terms of “Margin and Markup.” After all, they are remarkably similar. But when it comes to the bottom line, they are recorded and calculated different. Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.
For example, suppose the price of a product is $100, and it costs $80 to make. Both the markup and the margin would be $20. We calculate the profit margin percentage by dividing $20 by the $100 selling price and that equals to 20%. However, we calculate the markup percentage by dividing $20 by the $80 cost and the markup percentage would be equal to 25%.
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It is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage.
Focus on the Profit Margin
A company’s main focus when it comes to pricing should be based around their profit margin. The margin measures the efficiency of a company when using their labor and raw materials in the production process. The profitability of a company relies on the established profit margin. For this purpose, a company should spend the proper time and effort to calculate the perfect profit margin for their industry and needs.
Pricing for Profit
Discover your company’s perfect price for maximum profitability. As you analyze the benefits of using margin, it’s an opportune time to also take a look at your pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.
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