Believe it or not, there is a lot of confusion over this. It’s not uncommon for the term to be used interchangeably among Parts Managers, Accountants, and other financial professionals. I have heard owners, managers, and dealership parts managers say, “We’ll price this part with a 40 percent markup.” What they really mean to say is “a 40 percent gross profit margin.”

The confusion can be costly when one term is used mistakenly for the other. The terms are not interchangeable, and the results of both methods are far from similar. Calculating a selling price based on gross profit margins will result in a higher price than using markup. Consequently, a failure to appreciate the concept can have disastrous results. The financial performance of your parts business begins with the top line – sales revenue. Using the wrong basis for setting selling prices will result in lower gross and net profits.

**Margin Definition**

Margin (also known as gross margin) is sales minus the cost of goods sold. For example, if a product sells for $100 and costs $70, its margin is $30. Or, stated as a percentage, the margin percentage is 30% (calculated as the margin divided by sales).

**Markup Definition**

Markup is the amount by which the cost of a product is increased in order to derive the selling price. To use the preceding example, a markup of $30 from the $70 cost yields the $100 price. Or, stated as a percentage, the markup percentage is 42.9% (calculated as the markup amount divided by the product cost).

**Markup vs. Margin**

Selling Price | |

Cost Price | Gross Profit |

**Markup = Gross Profit / Cost Price**

**Margin = Gross Profit / Selling Price**

Profit Percentage Desired | Multiply Cost by | ||

10% | 1.1111 | 30% | 1.4285 |

12% | 1.1363 | 32% | 1.4705 |

14% | 1.1627 | 34% | 1.5151 |

16% | 1.1904 | 36% | 1.5625 |

18% | 1.2195 | 40% | 1.6666 (most common) |

20% | 1.2500 | 42% | 1.7241 |

22% | 1.2820 | 44% | 1.7857 |

24% | 1.3157 | 46% | 1.8518 |

26% | 1.3513 | 48% | 1.9230 |

28% | 1.3888 | 50% | 2.0000 |

So, there is a difference between margins and markup. Absolutely! More and more, these two terms are being used interchangeably to mean gross margin, but that misunderstanding can have a drastic impact on the bottom line. Markup and gross profit margin are not the same! Shops must have a clear understanding of the two within a pricing model. Many shop owners mistakenly believe that if a part is marked up, say 25 percent, the result will be a 25 percent gross profit margin on the income statement. But that is wrong!

Not All Markups are Created Equally

Many automotive business consultants suggest an overall 100% markup on parts in order to achieve an overall 50-55% profit margin. This markup is important to achieve a 30 to 35% net operating profit. Shops that fail to succeed often have net operating profits of less than 15%.

Some shops just double the list price of some of the parts they sell. While that is an effective strategy for a $7 oil filter, it doesn’t work so well for a $400 alternator. Consider using a Parts Matrix or making sure it is set up properly.

The following bullet points note the differences between the margin and markup percentages at intervals:

- To arrive at a 10% margin, the markup percentage is 11.1%
- To arrive at a 20% margin, the markup percentage is 25.0%
- To arrive at a 30% margin, the markup percentage is 42.9%
- To arrive at a 40% margin, the markup percentage is 66.7%
- To arrive at a 50% margin, the markup percentage is 100.0%

To derive other markup percentages, the calculation is:

*Desired margin ÷ Cost of goods = Markup percentage*

**Example of Margin and Markup**

For example, if you know that the cost of a product is $7 and you want to earn a margin of $5 on it, the calculation of the markup percentage is:

$5 Margin ÷ $7 Cost = 71.4%

If we multiply the $7 cost by 1.714, we arrive at a price of $12. The difference between the $12 price and the $7 cost is the desired margin of $5.

**Calculating Selling Prices**

If you know the cost and the desired margin, you can use this information to calculate the selling price. Divide the cost by the reciprocal* of the margin you want:

Cost / (100% – GM%) = Selling price

For example, if the cost of an item is $200 and you want a 40% margin:

$200 / (100% – 40%) $200 / (60%)* $200 / .60 = $333.33

**But will my customers pay the higher parts prices?**

If your customers love your service, the price of the parts won’t scare them away. You won’t do them any favors by discounting your way out of business. Parts pricing is part of total profitability. A profitable business will have staying power. Choose the markup matrix and enjoy making a higher profit.