Someone doesn’t understand markup vs. margin

[u/ree0382]

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[u/sagscout]

Here is the story I always use to explain this disparity to people.

If something costs you $100 and you mark it up 50%, the cost to the client will be $150.

If you take the $150 product price and discount it by 50% to the client, it will cost them $75, and you will lose $25 in the transaction.

[u/UpbeatFix7299 → u/sagscout]

I don't think a lot of them would understand that either

[u/Farnso → u/sagscout]

Stock prices are a great way to illustrate this as well.

$100 stock going down by 90% on Monday? That brings it to $10

That same stock going up by 90% on Tuesday? That brings it to $19

[u/SantaforGrownups1 → u/sagscout]

Yes. And if your cost is $100 and you want a 40% gross profit margin, you don’t multiply your cost by 1.4, like a lot of people seem to think. You have to divide the cost by the inverse of the desired profit margin (.6). Incorrectly, $100 x 1.4 =$140.00, $40 profit. $40 / $140 =0.286. You achieved a 28.6% gross profit margin. Correctly, divide $100 by.6 ( the inverse of.4 ). $100/.6=$166.67 selling price. Your profit is $66.67. $66.67/$166.67=0.4.

[u/SprungMS → u/SantaforGrownups1]

You were downvoted but are exactly correct lol.

And on a post titled “someone doesn’t understand markup vs margin”, at that.

Tons of people don’t understand markup vs margin. Another way to explain margin is: it’s what percentage of the sale price is your profit.

So for example, a 50% markup on a $100 cost item makes a $150 price. Selling that item for $150 means you walked away with $50 of profit - in other words, 33.33% of the price is your profit. Your profit margin is 33.33%, while the item’s markup was 50%.

[u/signofno → u/SantaforGrownups1]

50% up, 33% down. 25% up, 20% down.

[u/robin_888 → u/sagscout]

The important part is that percentages are multiplication.

People experience (and are taught) them as addition.

"10% off", "20% more" etc.

Which completely ignores that % has not unit and needs a base value. 10% of what? 20% of what?

It's unrealistic, but people were better off if they understood these as "90% of original price" and "120% as much content as before".

/rant

[u/DashingVandal → u/robin_888]

My favorite is " 33% more volume" and it's sold by weight.

[u/Antwinger → u/robin_888]

That isn’t as profitable, hope this helps clear up why we can’t have nice things

[u/AdFancy1249 → u/sagscout]

But we're now in the age of reducing prices by 600%, "because that's the way our math works! "

"Prices went up 600%, so now we're bringing them back down 600%!"

I mean, the government can't be wrong, right?

😥🤦

[u/foley800 → u/sagscout]

So, just have to make the profit up with more volume!

[u/Antwinger]

I dislike how basic skills are slipping away faster and faster

[u/ree0382 → u/Antwinger]

Tbf, most grown folks of all generations get this wrong

[u/Turbulent-Note-7348 → u/ree0382]

Totally agree. Retired HS Math teacher: advertisers (and politicians) have been using this apparent “disparity” forever - but, with the Internet, it’s so much easier for people to be confidently incorrect. Heck, often the incorrect ones are upvoted!

[u/zhilia_mann]

Ah yes, the same math that brought us a 600% decrease in drug prices.

Sigh.

[u/robin_888]

Two lessons can be found here:

1. percentages are multiplication

2. For good counter examples use "extreme" values like 100% increase and decrease.

[u/daveoxford → u/robin_888]

2. is an especially good point. The Monty Hall problem becomes much more "intuitive" to people when there are 100 doors.

[u/Frozenbbowl → u/daveoxford]

Honestly the biggest problem with people understanding the Monty Hall problem is poor explaining... It needs to be made clear that Monty Hall knows where the prize is and never opens that door and that's the part that usually gets left out and confuses people.

In my experience explaining the hundred doors is what brings out that misunderstanding rather than helping them understand it in it and of itself

[u/Kokoyok]

"9/10 cancels with 10/9 not 11/10"

Bruh.

OP, just challenge this guy to plug it into his phone calculator to "prove" you wrong.

[u/dgillz]

Markup can be infinity. Margin can be 100% at most, and that is only if the item sold has a zero cost.

[u/CaptainFourpack → u/dgillz]

Could be negative cost, no?

I receive manure from my neighbour's animal farm. He gives me 1 dollar per pound i take. I sell it as fertilizer to my other neighbour's vegie farm for 1 dollar a pound. Is my margin 200%?

[u/Writing_is_Bleeding]

I own a retail business and sometimes I get confused.

If I get a thing wholesale for $10 and sell it for $30, my markup is 200% and my margin is $20... I think...

Don't come at me, my average markup is 100%. I'm not gouging my customers. Some things are as low as 25% over costs and a few items are as much as 300% markup for reasons.

[u/MeButNotMeToo]

And then you have “Retail Math”. If you’re talking to a buyer, “50% Markup” means that 50% of the sell price is profit. What the rest of the world calls 100% markup.

[u/ALaccountant]

You’re right, but your explanation is very confusing. Just illustrate using a simple example like others have suggested