I hear owners of VoIP businesses regularly mix up the concepts of Margin versus Markup when calculating both prices and profits. Simply put, your Gross Profit Margin is the percentage of a sale that is gross profit. That means, you take out cost of goods sold and labor, and you have your gross profit. What percentage of your price is that profit? That’ your Gross Profit Margin.
Where people get confused is they’ve taught themselves to “mark up” their services and start thinking that is their ‘Margin.’
Here’s an example of the wrong way to do it:
- Your service costs you $50.
- You decide to mark that up for what sounds like a good profit, 50%
- 50% of $50 is $25. So, you sell this service for $75 and make $25.
- Your margin is 33%, $25 divided by $75.
Thirty-three ‘points’ is not a healthy margin. I can tell you from my VoIP experience, you want to aim for 50-65% gross margin. So, what would the price be on a $50 service, in order to get to 50% Gross Margin? $100. If your brain is still parked on ‘markup’, that would be a 100% markup. That’s where you need to be.