Ep. 449 Steve Raye U.S. Market-Ready | Markup vs. Margin

Thanks for tuning in. I'm Steve Ray, author of How To Get US Market Ready. And in this podcast, I'm going to share with you some of the lessons I've learned from thirty years in the wine and spirits business, helping brands enter and grow in the US market. I've heard it said that experience is what you get when you don't get what you want. My goal with the book and this podcast is to share my experience and the lessons learned from it with you so you can apply those lessons and be successful in America. So let's get into it. Margin versus markup. Ever wonder what the difference is? It's really that they're two sides of the same coin. In my work with both export and domestic wine and spirit brands, I commonly find that clients are confused by the difference between the two. But, of course, understanding this difference is absolutely crucial to managing business and particularly important in the case of the US three tier system where a price structure continually marks things up. So if you get it wrong in the beginning, it gets compounded. When you get to the end. The simple way to think about this is there are three primary terms that you're gonna be playing with and just doing some very simple changes in formula to get to your answers. And the three hour is follows. One revenue, also called gross revenue or sales, and that's the income generated by selling a product or service, how much money you receive for selling it. The second is Cost of goods sold, often called c o g s or pronounced cogs. Cost of goods sold includes the expenses that go into making a product and or providing a service. So in the case of product. It's all the wrong materials for liquid label bottle closure, reshipper, and so forth. And in the case of providing a service, the primary piece is labor. And then the third is gross profit, and that's the revenue remaining. After paying the expenses of making the products and or providing a service. Pretty simple. Revenue, cost of goods sold, gross profit. So to calculate margin, Margin, also called gross margin, shows the revenue made after paying the cost of goods. To calculate the margin, you start with your gross profit, which is revenue minus cost of goods, and then you find the percentage of the revenue that is gross profit. Let's use a simple example. Let's say that you sell a nine liter case for two hundred dollars. You've calculated your COGS cost of goods sold, to produce that case to be one hundred fifty dollars. So first, we're gonna find your gross profit, which is the difference between the revenue, two hundred dollars, and the cost, one hundred fifty dollars. So gross profit equals Two hundred dollars minus one hundred and fifty dollars or fifty dollars. To find the margin, this is where the formula comes in. We're going to divide gross profit by revenue. Let me repeat that. To find the margin, Not markup, define the margin, divide gross profit by the revenue. So the gross profit, in this case, was fifty dollars. The total revenue was two hundred dollars. So fifty dollars divided by two hundred dollars equals zero point two five. That's your margin. And if you want to express it as a percent, you just multiply that number zero point two five times one hundred, and that gives you twenty five percent. So in this case, the margin is twenty five percent. And the simple meaning behind it is you get to keep twenty five percent of your total revenue. Spent the other seventy five percent on cost of goods. Markups are different than margins. A markup shows how much more your selling price is than the amount the item costs you. Like a margin, you start with your gross profit, which is revenue minus cost of goods sold, and then you find the percentage of the cost of goods sold that is gross profit. So we're working on markup here again. Right? Using the example that we've had above, if you sell each case for two hundred dollars, the product costs you hundred and fifty dollars to make COGS cost of goods sold. So first, to find the gross profit, we take total revenue, two hundred dollars. Minus one hundred and fifty dollars equals fifty dollars gross profit. And then if you wanted to write that as a percentage, we divide the gross profit by the cost of goods solds. That's fifty dollars divided by one hundred and fifty dollars equals point three three. Multiply that by one hundred is thirty three percent markup. It's it's actually the same amount of money. Fifty dollars is the same dollar value in this example for both margin and markup, but when spoken of or when referenced as a percent, A thirty three percent markup equals a twenty five percent margin. That's where it gets a little confusing for people. How can two different numbers mean the same thing? Twenty five and thirty three equals fifty? That doesn't make any sense, Steve. Well, yes, it does. If you look at the actual math, it will be very clear when you see it on a piece of paper. Pretty difficult for me to do that in a podcast. I'm just trying to show you the basic difference in how to think about them. I'd highly recommend once again that you buy the book. You can also find a tool when you go to w w w get u s market ready dot com and register your email address under tools you'll find a price structure calculator, and it has a simple table for you to look at to differentiate margin versus markup. So, and when we're thinking about margin versus markup, They interact in a very predictable way. Each markup relates to a specific margin. Markups are always higher than their corresponding margins. This is Steve Ray, saying thanks again for listening on behalf of the Italian wine podcast. To ignore the facts does not change the facts.