May 25, 2024
Farm Market & Agritourism: markups vs. margins

A retail farm market manager knows that their business needs to make a certain gross profit percentage, in this case, let’s say 30%. What do they do?

The manager takes the cost of the item and adds 30%. Does adding 30% markup to that item really mean you are making a 30% profit margin? Well, no. To determine the profit margin you made on an item, you need to take the markup amount and divide that by the sale price of the item and that will tell you your profit margin.

Here’s an example. Let’s say an item in your store cost you $1 to purchase. You take that item and add 30% to it. Now, you sell the item for $1.30. You’ve made 30 cents on that item. You divide 0.30 by 1.30 and you will see you’ve made only 23% gross profit on that item.

farm market Understanding markups and margins helps farm market operators with pricing strategies. Photo courtesy of Brian Moyer.
Understanding markups and margins helps farm market operators with pricing strategies. Photo courtesy of Brian Moyer.

 

Think about every item in your market. If you were adding 30% to all your products and thinking you are making a 30% gross profit margin when in fact you are losing almost 25% of your gross profits.

If we go back to $1 product cost, that product would need to sell for $1.44 to make a 30% profit on it. Again, take $0.44 (the profit made from the item) and divide it by the sale price of $1.44 and you get a 30% profit margin.

Figuring out your markup percentage

The markup percentage is your unit cost X the markup percentage, and then add that to the unit cost to get your sales price.

For example, if the unit cost is $5, the selling price with a 30% markup would be $6.50:

  • Gross profit margin = sales price – unit cost = $6.50 – $5 = $1.50.
  • Markup percentage = gross profit margin/unit cost = $1.50/$5 = 30%.
  • Sales price = cost X markup percentage + cost = $5 X 30% + $5 = $6.50.

How to calculate gross profit margin percentage

Gross profit margin is the gross profit divided by sales price. In this example, the gross profit margin is $1.50. This gives us a 23% gross profit margin percentage: Gross profit margin percentage = gross profit/sales price = $1.50/$6.50 = 23%.

These are rather simplified examples and we don’t have the same profit expectations for every item in our market. However, if we understand the difference between markup percentages and gross profit margins, we can have better flexibility in our pricing strategies.

Our customers have certain expectations on the price of our fruits and vegetables, so we may not have that much flexibility on what we can charge. But, if we can create packages or bundles with value-added items that we can have a higher gross profit margin on, we can increase the overall gross profit for that fruit or vegetable.

About the author

Brian Moyer
Brian Moyer

Brian Moyer is an educational program associate with Penn State Extension. As founder of PA Farm Markets LLC and founder and manager of the Skippack Farmers Market, Moyer specializes in assisting farmers markets, retail farm markets, direct-to-consumer sales, and new and beginning farmers with marketing, business and regulatory issues.

 




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