• Section: Inventory
  • Last updated: June 20, 2019, 7:18 p.m.

Set Inventory Prices

Margin, markup and markdown are accounting and sales terms regularly used in business. Although sometimes used interchangeably, the terms are related, but not equivalent. Markup percentage is the percentage difference between the actual cost and the selling price. Often, when you want to determine the selling price of an item, and how much you want to make on the sale, you would use the markup percentage.

Markup percentage = ((Selling Price - Cost) / Cost)
Of course, you need to consider what the market will bear, and what customers are willing to pay. So, it's important to find a price that optimizes profits while maintaining a competitive advantage.

Margin, specifically profit margin, is the percentage difference between the selling price and the profit. Profit margin indicates—well profitability. This is the measure of business success, and is useful when comparing your profit with companies in your industry.

Margin percentage = (1 - (Cost / Selling Price))
When you display reports to show profits, the profit margin is the percentage being referred to.

The problem is some people mistakenly believe if a product or service is marked up 25% the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%. The following table lists a comparison of various markups versus margins.

Markup versus Margin
15% Markup13.0% Gross Profit
20% Markup16.7% Gross Profit
25% Markup20.0% Gross Profit
30% Markup23.0% Gross Profit
33.3% Markup25.0% Gross Profit
40% Markup28.6% Gross Profit
43% Markup30.0% Gross Profit
50% Markup33.0% Gross Profit
75% Markup42.9% Gross Profit
100% Markup50.0% Gross Profit

Use Markup or Margin to Set Prices

Using margin calculations to set prices is a more sophisticated model than using markup. When a business owner analyzes the company's financial statements, all the income and expenses expressed on reports are a percentage of the business's total sales. Owners are looking at profit dollars earned, expressed as a percentage of sales (that's gross profit margins). Owners are looking at labor costs as a percentage of sales; looking at marketing as a percentage of sales; looking at discounts, returns, administration overhead, all as a percentage of sales. When you use margin to set prices, you will be using the same percentage that you will see when you report results. If, however, you're pricing products with markup, then analyzing your statements to find out if your store met its overall profit margin, it may be confusing because you have to constantly translate between mathematical languages, even though it's initially easier to use markup to set prices.

Use Tools

One way to eliminate errors and confusion is to use tools to assist in setting item prices. Fortunately AccountEdge Pro provides a tool to set prices of inventory items. To start the process, open the Set Item Prices window (Command Centers > Inventory > Set Item Prices). Select to view either the Average Cost or the Last Cost, then select either specific items or the entire list.

Now, click the Shortcuts button to open the Pricing Shortcuts window. Here you can select the pricing calculation method. Select Percent Margin to price based on profit margin percentage, Percent Markup to price based on markup percentage, or Gross Profit to price based on a gross profit for item sales. Then select the basis for the calculations, either item Average or Last Cost. You can also specify how to handle the resultant price. That is, leave as is or round.

Finally, from this window you can click the print button to print a Price Analysis report. This report will display the cost basis as well as the resultant prices, and markup and margin percentages. Unfortunately printing from this window does not allow you to customize the report. To print the report with better (customizing) control, select Reports > Index to Reports > inventory > Pricing > Price Analysis.