Hey! Did you know that MARKUP and MARGIN mean different things? If you didn't or if you're looking for a different way to think about MARKUP versus MARGIN, this video is for you!
Before we dive into the numbers, I want you to visualize a cake. A pretty simple cake that's made up of 2 layers. The top layer is your icing. The bottom layer is your sponge. And because we've got a pretty sweet tooth our icing:sponge ratio is 100:100 or 1:1. When you add your icing to your sponge, what do you get? You get your cake.
Now let's flip that into accounting or pricing terms. When you think about your sponge, I want you to think of them like your job costs. When you think about your icing, because it's nice and sweet, it's like your gross profit. And when you add your job costs to your gross profit, what do you get? You get your selling price, which is like your cake.
Got it? Now that we have all the ingredients, we can look at what's the difference between MARKUP and MARGIN.
What MARKUP is asking you is, "What is your icing:sponge ratio or your gross profit:job costs ratio?" Well, we know that icing has an area of 100 and our sponge has an area of 100. 100:100 gives us a MARKUP of 100%.
What MARGIN is asking you is, "What is your icing:cake ratio? Well, we know that our icing is 100 and our cake is 100+100, which gives us 200. 100:200 gives you a MARGIN of 50%. Got it? So, what are the key takeaways here? One, MARKUP is always higher than MARGIN. Two, you never want to get confused between whether you're using MARKUP or MARGIN when pricing your jobs, because that will have a detrimental impact on your pricing. And three, although it's not demonstrated in this board, every contractor has their own unique MARKUP. So, never asked your neighbor what their MARKUP on their jobs are, because that is going to have a bad impact on your business.
If you found this video helpful, please tag someone down below. If you have any questions, also add your comments below. Thank you. And until next time, cheers!