Words are wonderful things, they allow us to communicate meaning.
However, some words are easily interpreted in differing ways, making the shared understanding challenging, and sometimes the differences are exploited in a selling situation.
One of the common “pea & thimbles” I see when small FMCG (CPG to my American friends) businesses are negotiating with chain retailers is the variable use of mark-up and margin, particularly by retail buyers in a high pressure sales situation where the supplier is being put through the wringer.
Following is a quick explanation of the generally accepted meaning of the two terms.
Mark-up reflects the number, absolute or more generally percentage that an item sells above its cost.
If an item costs you $1.00, and you sell if for $1.50, the mark-up is 50%
Mark-up = profit/Cost
Margin is the profit made as a proportion of the sale price. Using the simple example above, profit is .50 cents, the selling price is 1.50, so the margin is 33%.
Margin = gross profit/revenue.
Imagine you are negotiating a promotional deal with a buyer, a discount for a period of time against an agreed purchase volume by the retailer. The buyer uses the terms interchangeably, referring to his margin as only 33%, when his minimum allowable is 45%, conveniently forgetting that one is margin, the other mark-up. He uses that as a means to persuade you to dip deeper into your pocket to fund the promotion based on the significant orders you will be receiving, and might even do a ‘once-only, just between us’, deal where he accepts 40%.
He has not done you a favour, but he has enhanced his margins, which is generally the retails KPI, considerably.