Unlock profitability by understanding the difference between markup and margin. Learn to calculate and apply these strategies to optimize pricing and maximize profits in the wholesale fashion market.
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How well do you know your numbers? Or, more accurately, how well do you understand your numbers? Getting to grips with the differences between markup and margin might not seem like the most exciting task. But it can be one of the most financially transformative—and it is undoubtedly a critical aspect of running a successful wholesale fashion brand.
Knowing how to calculate markup and margin in fashion retail is a strategic necessity. Taking time to understand them early in your wholesale journey arms you with the ability to pull the correct levers as your business grows and continuously develop pricing strategies that enhance your profitability.
There are several different triggers that might prompt you to take a closer look at your financials.
Are you:
All of these are common issues. Other factors, such as the age or maturity of your fashion brand, can also come into play.
If you’re a younger brand, for example, then genuine economies of scale might not yet be within your reach – certainly compared to larger, more established brands. You might have higher marketing costs, or less efficient operations. So to maintain your competitiveness with those larger brands, you may often need to squeeze your margin. Against that backdrop, it becomes even more clear why you need to be fully aware of the differences between markup vs. margin.
Trickily, markups and margins are extremely closely related. But, crucially, they are not the same thing. In this piece, you’ll learn the key differences between them, why it’s important to understand both, and the benefits each one offers in putting your brand on a sound business footing.
Markup in wholesale fashion represents the difference between your selling price and your buying price, and your ability to calculate and understand your gross profit on the items you sell.
At every stage of the distribution journey, a markup is applied. The initial manufacturer will incur costs for creating the product. They will then add a markup before selling that product to you.
You, as a wholesale fashion brand, will have to factor in both your overall running costs and the cost of the specific item, before adding an appropriate markup on each item that you sell to retailers.
Retailers will do the same. They’ll factor in all their running costs, including staff and stores, and arrive at a markup figure that ensures they’re charging a suitable amount to the end customer.
How you arrive at your specific markup will depend on your competition, the industry standard, and what your customers (the retailers) are willing to pay. But in general, most businesses in fashion work on a markup of 120%-160%.
Imagine you buy a product for $30 and sell it for $70. Your profit is $40. Your markup is 133.3%
Margin in fashion retail represents the difference between your buying price and your selling price.
At first glance, that may sound the same as markup. But the difference is your starting perspective. In markup, you view the figures from the perspective of your final selling price. In margin, you view the figures from the perspective of your initial buying price.
If, for example, you buy a product for $30 and sell it for $70, your profit is $40. Your margin percentage is 57.1%.
Neither is inherently ‘better’. As a growing wholesale fashion brand, it’s important to fully understand both. But there are differences in their uses.
First, let’s reinforce the crucial difference between markup vs. margin: the basis for markup calculation is cost. The basis for margin calculation is revenue.
Consider the examples in the previous two sections: the same figures are used in both of these calculations, but there is a big difference in markup (133.3%) vs. margin (57.1%).
Markup is useful for setting prices and understanding gross profit on individual items.
Margin provides a more accurate measure of profitability and over all financial performance.
In general, most observers believe margin is amore reliable indicator of business success.
If you don’t take the time to master markup vs. margin, you could be exposing yourself to an unnecessary high level of business risk. Some of these risks are small. Others are much larger. But they all work against your ambition of scaling into a more profitable, more sustainable, and more successful fashion brand.
If you misunderstand markup, and end up working with markup percentages that should realistically be higher than they are, you are likely to generate only very small (if any) profits. There are, however, several JOOR features that can help you keep on top of your figures and ensure you are using an appropriate markup across your business.
- Real-time inventory tracking gives you crucial visibility into your live stock status. At the touch of a button, you can get instant, detailed, and accurate information about your entire inventory levels. This enables you to make informed decisions about pricing adjustments and promotions, preventing overstocking or stock outs, and ensuring your markup is always optimized to the market demand.
- Marketplace exposure helps you expand your reach as a wholesale fashion brand. As you secure higher sales volume, you’re able to improve your markup margins by leveraging economies of scale to negotiate better costs with your suppliers.On the flip side, running too low a margin in fashion retail can jeopardize your financial viability by failing to accurately allow for operating costs, competitive pricing, and profit. Many other JOOR features have been proven to have positive impacts on your ability to manage your margin.
- Efficient order management is essential for healthy margins. By reducing errors and delays, you can help to eliminate unnecessary costs. You can also improve customer satisfaction, which could give you scope to successfully raise your prices in the future.
- Centralized order management enables you to streamline your order processing, giving you the insights and scope to quickly adjust pricing and optimize inventory levels based on demand.
- Advanced analytics and reporting tools provide valuable data on sales performance, buyer interactions, and market trends – all of which can be used to help set competitive yet profitable pricing strategies. By understanding which products are performing well, you’re able to focus on selling more higher-margin items – and adjusting the markup on under-performing products to boost sales.
Integrating JOOR with ERP and CRM systems helps you to forecast demand more accurately, and therefore better plan your production and pricing strategies. Ultimately, this helps to protect your margins at every turn.
Yes, markup and margin can be confusing to begin with. But if you master them, and get these calculations clear in your mind, you can be much more confident in your ability to drive forward your wholesale fashion business with effective pricing strategies, maximized profits, and long-term and enduring success.
Book a JOOR demo today and get an inside glimpse of what our leading B2B platform can do to help you protect your markups and margins, and ensure you achieve all of your brand ambitions.
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