There is a lot of retail verbiage that goes around in conversation. As a retailer, knowing what it all means is your job. One of the most difficult concepts in retail is retail pricing strategy, specifically markup and margin pricing. What do these two terms mean? This guide will break down each and walk you through why they’re so important and how to use them effectively. Read on for more!
What is Margin?
The margin represents the percentage of total sales in revenue that is considered profit. It’s calculated by subtracting the cost of goods sold from the total revenue and dividing that number by the total revenue. It seems like a lot of math involved but it’s good to know as a retailer when you’re setting prices.
What is Markup?
The markup is the cost price of a product when it arrives at its selling price. For instance, if you bought a shirt for $60 and sold it for $100, your markup would be calculated by subtracting the cost of goods sold from the selling price and then dividing that number by the cost of goods sold. So, the markup price would be $40 for one unit sold.
Why Understanding Margin and Markup Matters
When considering these terms, consider them within your store and merchandise. Once you know each one’s key differences and benefits, you’re in a better position to set your own prices with desired profit levels. Also, having the most accurate costs can eliminate issues like overpricing or product underpricing, which can majorly affect your bottom line.
Tips for Using Margin and Markup Effectively
As a retailer, you’ll want to fully understand your cost of goods, otherwise known as COGS. When you know this, you’re able to make accurate calculations that can result in more revenue. It’s important to monitor the competition around you and their pricing so that you can always have better or matching pricing for your merchandise. Also, consider seasonality when you think about COGS. Be prepared to adjust your prices based on demand during specific seasons and popular market trends.
Common Mistakes to Avoid
The most important thing out of all of this is to remember the difference between markup and margin pricing and sales volume. Don’t confuse the three. Higher margins might lead to higher profits per unit, but if the price is too high, it could reduce sales volume. On the other hand, lower markups might increase sales volume but reduce profit per unit. Striking a balance is key to maintaining a healthy bottom line. Also, always factor in the COGS to avoid underpricing. If you have products underpriced, it will hurt your overall profit and revenue.
Summary
Knowing the terms that are often brought into the retail conversation, like markup, margin, sales volume, COGS, and more, can make you a better retailer or business owner. These metrics are crucial in understanding where you’re at regarding profit, sales, etc. They also help you stay ahead of the competitive landscape, which can benefit your space in the long run. Check out Specialty Store Services today on other retail tips and tricks as well as retail solutions like fixtures, signage, and more!