For some reason, one of the hardest concepts for marketing students to grasp is the difference between margin and mark-up. For most students, the two terms are synonymous and used interchangeably. Believing this leads to marketers short-changing themselves when setting price. The margin is the percent profit that you seek to earn on each item sold. The mark-up is the percentage that the cost must be increased to allow you to earn the margin.
For instance, most media pay advertising agencies a 15 percent commission for bringing them business. Hypothetically, if a 30 second radio ad (non-drive time) is priced at $100 and is sold to a client by an agency, the client pays the agency $100 and the agency pays the radio station $85 (making $15). If the media is doesn’t pay commission, the agency marks-up the spot by 17.65 percent in order to make a 15 percent commission on the placement (the desired margin). The small agency where I worked needed to earn 28 percent or more gross margin on all transactions in order to remain profitable (agencies can’t exist on the 15 percent commission alone). So if we marked-up the cost by 15 percent instead of the required 17.65 percent, we short-changed ourselves and made the goal of 28 percent gross margin more difficult to attain.
It’s easy to confuse the two concepts. An advertising textbook that I’ve used in the past presents it incorrectly by showing a 15 percent mark-up in its pricing examples. The table below is designed to assist you to quickly determine your selling price based on the margin that you’re seeking. Simply identify the margin sought on each item and multiply the cost (the cost of the item to you, or your fixed cost per unit plus your variable cost per unit) by the number in the mark-up required column.
A 25 percent margin requires a mark-up of 33.33 percent and a 50 percent margin requires a mark-up of 100 percent (x2). If you have a product or service for which you want to make a 30 percent margin, and the cost of the product or service to you is $100, multiply $100 x 1.4286 to reach your selling price of $142.86: It’s that easy.
Now that you have this table, there are no more excuses for confusing margin and mark-up. After applying my preferred mark-up of 100 percent, your purchase price for this information is $0 (free) – but the lesson is invaluable.