As any veteran decorator will tell you, while the craft of decorating—whether it be embroidery, screen printing, heat pressing or digital decorating—is critical to professional success, it’s only part of the equation. Just as important is getting a handle on the business side of things. This includes everything from marketing and logistics to budgeting, accounting and assessing your cost of goods sold.
In this article, adapted from a post originally published online by Anbin Muniandy, CEO and principal engineer the online business management company YoPrint, the author unpacks the nuts and bolts of determining product markups and margins so you can make substantial profits to boost your print shop’s finances.
Ultimately, it’s impossible to run a successful business—or even know how you’re doing in the short term—without getting a handle on the “numbers” involved, not the least of which is the amount you’re charging for the products you’re setting.
Decorated Apparel Profitability and Markups
For all the complexity that goes into running a successful business, even a relatively small one, the formula for profit is a surprisingly simple one: price – cost = profit.
With that as a starting point, the question becomes, “How can you price your products for profitability?” To answer this question, let’s look at two common pricing strategies: markups and margins.
With respect to the first, markup is the difference between price and cost. In other words, markup is your profit. Let’s say Jane runs a screen-printing business. Buying, printing and preparing a shirt for sale costs $20.00. Jane wants to make a profit of $10.00. Jane therefore “marks up” the T-shirt by $10.00, which brings the product price to $30.00. Markup is $10.
Related to a product’s markup is something called “markup percentage,” or the profit-to-cost ratio. Often, when someone is talking about markup, they are referring to markup percentage. To determine markup percentage, subtract the cost of creating the product from the price, then divide the result (or “difference” to use the correct mathematical term) by the cost. The result will be a decimal number. To convert to a percentage, multiply by 100. Here is the formula written mathematically:
(price – cost) / cost = markup
Going back to Jane. Her cost is $20.00, and her price is $30.00. Therefore ($30.00 – $20.00)/$20.00 = 0.50. Multiple that by 100, and you get 50 percent.
Once you have determined your markup percentage, you can generate the price for other products or the same product in the event your costs change by using the formula: cost + (cost x markup) = price.
Let’s say, Jane’s cost for the product above goes up by $5.00 year-over-year, and Jane wants to increase her price to maintain the same markup, or profitability, level. She can do so by using her current markup percentage to generate the new price.
Doing the math, if her cost increases by $5.00, that brings her total cost to $25.00. Her new price for the product in question should therefore be $25 plus $25 times 0.5 (or $12.5), which results in a price of $37.50. Represented mathematically we have: $25.00 + ($25.00 x 0.5) = $37.50.
Moving up to Margins and Decorated Apparel
Related to, but different from markup is something called “margin” (short for “gross profit margin”). Margin is also known as the profit-to-price ratio. To determine margin, subtract the cost of a product from its price, then divide the resulting difference by the price. Here is the formula:
(price – cost)/price = margin.
Using Jane again as an example, the product’s cost is $20, and the sales price is $30. To determine the margin, you subtract $20 from $30, then divide the result by $30. This gives you a margin of 0.3333. Multiplying by 100 you get 33.33 percent. Put another way, Jane makes 33 cents for every dollar earned. This is a key insight! Represented mathematically: $30 – $20/$30 = 0.33; 0.33 x 100 = 33 percent.
As is the case with markup, you can use margin to calculate the price of other items in your product line or the same product in the event of a cost increase. To do so divide the existing cost of the product by the number one minus the margin in its decimal form, per the following formula:
cost/(1 – margin) = price.
Going back to Jane, we know Jane’s current margin is 33 percent. We also know Jane’s cost for producing the product in question is increasing to $25.00. Plugging the numbers into the formula gives us: $25/(1 – 0.33) = $37.31.
Markup vs. Margin and Apparel Pricing
While it’s true markup and margin can both be used as a means of arriving at profitability, they represent flip slides of the same coin, so to speak. Specifically, markup represents a cost-first approach to pricing in the way it answers the question, “What markup, or amount, can I charge customers on top of my production cost?”
In this case, you have determined your cost; you have determined your acceptable profit and your revenue/price is the resulting dependent variable, i.e., the price you charge “depends” on the first two assumptions.
This approach, in turn, is a perfect way to:
- Ensure your business is making a profit with each sale
- Help new business owners understand how cash flows in and out of their business
By contrast, margin represents a value-first approach in the way it answers the question, “What value does my product or service create for the customer?” In this case, you know what your customer is willing to pay, you’ve figured out your cost and your profit is the dependent variable.
This approach represents a great way to:
- Understand your cost efficiency and track performance
- Identify the effectiveness of individual products or services and look for areas of improvement
- Quickly identify profit per dollar earned
Markup, Margin Conversion
In practice, the markup percentage will always be higher than your margin. The reason for this is due to the fact that if your markup (i.e., the amount of profit you factor into your pricing) is less than your margin (i.e., the increased valued 
reflected in your pricing), you are sustaining a loss. For the mathematically inclined, to convert a markup amount to a corresponding margin and vice versa, use the following two formulas:
1 – 1/(1 + markup) = margin; 1/(1 – margin) = markup
For those less inclined to crunch the numbers, the accompanying table does the job for you. Note how as markups increase the corresponding increases in margin become less and less. At my company, YoPrint, we’ve also created a free online tool to help you with your markup and margin calculations at the URL: yoprint.com/tools/margin-markup-calculator.
Which is Better for Professional Apparel Decorators?
So far so good. However, given the way markup and margin represent two different means of pricing goods or services, the question becomes, which one works best? The short answer: margin.
For one thing, when it comes to recording your business’ financial information, you’ll find your accountant or bookkeeper will invariably be more interested in the margin than markup. Same thing with whatever kind of accounting software you may want to go with.
Equally important, a major downside to using markup-based pricing is the fact it may result in your business being less profitable than it might otherwise be. The reason for this is that by knowing what your customers are willing to pay, as opposed to deciding on a markup ahead of time, you can readily increase your price as necessary and, by extension, improve your margin. It is for this reason that I recommend pricing your services using margins instead of a markup.
No matter which of these two methods you ultimately decide on, the main thing is that you understand the relationship between markup and margin, including both their similarities and their differences. This kind of in-depth understanding not only allows you to price your services competitively, it can help you set both your short and long-term goals more effectively.
Anbin Muniandy is CEO and principal engineer at the online business management company YoPrint, which offers what the company describes as “all-in-one print shop management software. For more information, visit yoprint.com.
