Here at TradeGecko, we interact with a wide range of passionate entrepreneurs every day. We’ve seen thousands of different business models - ranging from one-person operations, to global enterprises that span across continents.
No matter the size of your operations, all businesses that deal with selling products has to grapple with selling price and cost price. Although calculating these numbers can range in complexity, the underlying principle is the same - you must price your product in a way to ensure that your costs are covered, and that everyone involved in the process gets a cut of the profits.
Although most people understand this in principle, accounting terms can be more difficult to grasp. Markups and gross margins can sometimes be used interchangeably, when they are in fact, two very different concepts.
It’s important that you use the correct terminology when discussing these terms with your suppliers to prevent miscommunication.
So what exactly is the difference between markups and margins?
We've assembled a useful infographic to help you differentiate between the two (kind of similar) concepts.
When to use what?
Now that you know the difference between markups and margins, you’re probably wondering which figure to work with.
To determine a selling price, the figure you should use is markup. Typically, different players along the supply chain will have relatively strict bands that they adhere to. In industries where competition is fierce, there may be standard accepted margins across industries. For instance, sourcing agents in China are used to dealing with a standard rate of 5-7% of the total order value.
This way, you can figure out the lowest price at which you’re willing to sell your products.
When you’ve reached your calculating your year-end performance however, it's typically better to use margins. Be sure to differentiate between gross margins (the topic of this article), and net margins, which take into account other operating costs.
Use the right tools in negotiations
In negotiations, few things speak louder than numbers. Ensure that you're approaching your suppliers with the right figures. Few things will erode confidence quite like misunderstandings in matters such as margins. Get off on the right foot with all of your trading partners by getting the basics right - start by differentiating between markups and margins.
To help businesses keep track of the right numbers, TradeGecko integrates with Xero accounting software. This way you get real time access to your inventory information, and all of the corresponding financial and accounting data that comes with it.