Mark Up and Profit Margin

[corminator]

Hi all,

Been trying to understand a business related issue that I think probably is a little different in the world of e-commerce to general business and can't seem to find a definitive answer.

It is regarding mark ups and margins.

I'll give an example for a product which has a 100% markup(?)

If i buy from a supplier a product which costs £95+£5 delivery +VAT= Total landed costs are £100+VAT

If I sold on ebay for £200+VAT(free P+P) and didn't account for any Postage, Ebay or Paypal fees would this be a 100% markup?

Or would it only be classed as a 100% markup if I received £200+VAT after these expenses had been accounted for- Sell for say £260 and receive receive £200+VAT after these costs.

Also again with profit margin. I understand profit margin to be net profits divided by revenues. So if my revenue paid to me by a customer for a product is £100+VAT (£120) and I made £50+VAT (after ebay, paypal, and P+P costs) this would be a 50% profit margin. Is this right.

If anyone can clarify would be much appreciated

 

[japancool]

If you're VAT registered, and your cost is £100 ex VAT, and you sell for £200 ex VAT then:

Markup = 100%
Margin = 50% (£100 profit / £200 revenue)

 

[corminator]

Hi,

Thanks for reply. So does that mean that in the example you have used you can have a 100% markup but no profit if costs- ie your postage, ebay and paypal fees wiped out that £100 profit?

 

[japancool]

Your gross margin or markup should be high enough to ensure you can cover those things.

 

[bharris]

profit margin is all you should look at. As above you have to cover ALL costs or there is no point in selling it. I'm sure you wouldn't run a business just giving people cash for nothing in return. Make shore every thing is covered and then see how much profit you make. It can be quite shocking how little you can make especially if your selling on eBay/Amazon etc.

 

[alanc]

When calculating profit and you're VAT registered, ignore any VAT as it's not yours.
(VAT on purchases merely reduces the VAT you have to pay;
VAT on sales belongs to HMG).

 

[Pish_Pash]

Gross profit = profit before any expenses are taken into account, therefore you buy something for £100, sell it for £240 inc VAT (£200 exc VAT), your gross profit is £100.

They key is to make sure your gross profit per product is sufficiently high to ensure you make a net profit at the end of the year .... i.e. profit after expenses - you mentioned postage, it doesn't end there.... rent, rates, utilities, transport costs, salaries etc...these all impact on your final (net) profit.

 

[apricot]

Pricing items is an issue for me too. It drove me crazy to figure out how to calculate profit etc.. This is what i do.. it worked well so far..
Item cost= item price+import price
Selling price= item price *4
If the item costs £10 for me, i sell it for £40
This covers, all my tax, fees, packaging, hidden costs etc and plus leaves me profit.

 

[japancool]

And another thing - there is no difference whatsoever between working out a profit margin in e-commerce compared to "general business".

Your profit margin is how much money you made. Pure and simple. The difference in any business is that they have different things that make up their costs.

Markup and gross profit margin are simply different ways of saying the same thing. If you want to make £100 on an item that cost you £100, then it's either a markup of 100% or a margin of 50%.

 

[corminator]

Thanks for the replies guys,

I think my question may have came across wrong. I was being theoretical with the mark up of 100% and no profit. Obviously we are all in this to make money, so you obviously set the price to do so regardless of "mark up" or "margin".

I read a few posts where some people said stuff along the lines of "i always set my price as 100-200% margin" or mark it up by such and such amount and i was just wondering if they factored in ebay,pp, postage fees in their figures.

I think pish pash got where i was coming from. Maybe it is more of an accounting question. Obviously there is warehouse rent, utilities and other overheads but just wondered if people factored in ebay.pp and P+P in their margin,markup calculations above. I would have thought it could be argued to be a Cost of Sale and so factored in

Japancool, the reason i suggested it was different was because of the issue above. I wondered if the mark/margin calculation/ included these costs which are a necessary part of the sale but are not in some other businesses.

 

[japancool]

Thanks for the replies guys,

I think my question may have came across wrong. I was being theoretical with the mark up of 100% and no profit. Obviously we are all in this to make money, so you obviously set the price to do so regardless of "mark up" or "margin".

I read a few posts where some people said stuff along the lines of "i always set my price as 100-200% margin" or mark it up by such and such amount and i was just wondering if they factored in ebay,pp, postage fees in their figures.

I think pish pash got where i was coming from. Maybe it is more of an accounting question. Obviously there is warehouse rent, utilities and other overheads but just wondered if people factored in ebay.pp and P+P in their margin,markup calculations above. I would have thought it could be argued to be a Cost of Sale and so factored in

Japancool, the reason i suggested it was different was because of the issue above. I wondered if the mark/margin calculation/ included these costs which are a necessary part of the sale but are not in some other businesses.

If they're still in business, then whether they're online or offline, they will factor in their costs when calculating what markup they will put on their products, whether it's ebay pp, packaging or lost shopping trolleys.

If another business doesn't incur those costs, it doesn't include them in the profit calculations. If it does, then it includes them. If we used ebay, then of course we would include those costs, and that's one reason why we don't sell on ebay, because our market will not bear the additional markup we would have to put on to sell our products.

 

[Breaking Good]

In a way I think you may have overcomplicated things. A cost is a cost, whether it's cost of sales or expenses. That's not the case in an "accounting" sense of course but if you're just looking to work out what your selling price needs to be, then does it matter where the cost/expense sits? I would focus on what your selling price needs to be to make a suitable net profit (and if you can sell at that price) and not get too bogged down on what the gross margin is.

 

[Pish_Pash]

As soon as you input your sales & expenses into accounts software (I use quickbooks)...you get a good handle on whether your net profit is decent (assuming you enter your expenses monthly pro rata, not annually....i.e. all your costs, ebay/amazon commission, paypal commission, postage costs,salary costs, utilities, rent, cost of goods sold etc.).

It's all semantics really.....all my products are priced at the maximum I can get away with & yet still have customers buy them ...if your net profit is not high enough, quite often many don't have the luxury of increasing their selling price - in such a situation, if you can't cut costs, then the business isn't viable.

 

[corminator]

I think i have overcomplicated it bigtime! But it was a theoretical question. Im not that savvy with the business lingo. What i do will have a mark up or a margin ,but i just work out all my costs and see if i can sell it for more than i bought it when all costs are considered

But to summarise,

Margin and markup are always gross?

 

[japancool]

I think i have overcomplicated it bigtime! But it was a theoretical question. Im not that savvy with the business lingo. What i do will have a mark up or a margin ,but i just work out all my costs and see if i can sell it for more than i bought it when all costs are considered

But to summarise,

Margin and markup are always gross?

Net margin is net. Gross margin is gross.