208-596-6500 | Here’s a nit-picky issue that makes a huge difference for the potential success of a green start-up business.
A common mistake of first time green entrepreneurs is to price their goods and services based on “mark-up” instead of “profit-margin”. The fact is, a 50% “mark-up” is a lot less money than a 50% “profit margin”.
Let’s look at the difference…
Profit Margin is calculated as a percentage of the sale price. So, if you make a 50% profit margin on a $100 sale, your profit is $50 and your cost to produce the product or service is $50.
Mark-up is added to the cost to produce your product or service. If we were to price the same item mentioned above with a 50% mark-up, we’d add 50% of the production cost, or $25, to that cost to get the final price of $75.
In the mark-up example, the profit is only $25 on the total sale of $75, which is equal to a profit margin of only 33%.
Using mark-up to instead of profit margin can lead to chronic underpricing of goods and services which makes it much harder to succeed in business.
Also, investors consider profit margin, not mark-up, when judging the financial potential of a business, so it’s important to align your business processes to the interests of investors from the start. Even if you don’t plan to seek outside capital, you’re still the primary investor in your green company, so do right for yourself.
Here is how to calculate the price your product or service using the profit margin approach:
Take the cost to produce your product or service and divide it by the desired profit margin to get the sale price. Using our same example item, divide the production cost of $50 by 50% or 0.5 and you’ll get the sale price of $100 with a 50% profit magin.
