Margin, or markup?

A big chunk of my current role involves trying to convert a capability unit (with some great skills in the team, it has to be said) into a profitable business. That’s not necessarily easy – changing a culture created over years where utilisation was king – as long as we were busy, life was good – to one where we need to be busy but only if we’re doing the right things to keep projects profitable: get in; deliver a defined work package; avoid scope creep (Project Managers like to grab hold of good people); move on to the next thing.

That means that, in addition to managing a team of my own for the first time, this technical manager is also on a very steep learning curve as he grapples with being a business manager too (but I can’t forget my technical roots – I’m also Messaging Lead Architect – and I’ve got a number of technical activities to juggle as we improve our capabilities, standardise our delivery, and drive out further efficiencies).

I learned an important business lesson a few weeks ago, when my Manager sent me a “handy cheat sheet” for calculating margins on our day rates.  “But it’s wrong”, I exclaimed – “look, if I put 10% margin on £100 it says the answer is £111.11 – that’s 11% margin!”. “No Mark, that’s not how it works” explained my, extremely patient, Manager (let’s call him Alan because, well because that’s his name…).

Alan explained that I was applying mark-up, not margin (“Doh!”, thought I).

Alan went on to explain that margin requires working back from the price to work out the difference from the cost – whereas markup is simply adding a value on top of the cost to reach a price. So, if something costs £50 and is sold for £100 – that’s 50% margin but 100% markup.

That was an important lesson for me – thankfully one that I learned on a £25K piece of consulting, rather than a multi-million pound managed service…

Now onto the next challenge, making sense of revenue and margin flowing through umpteen cost centres…

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