Mark-up (avanse)
The difference between the cost of goods and the selling price, showing the profit made on each sale.
Avanse, the Norwegian term for mark-up, is the difference between the cost of goods and the selling price of a product or service. It shows how much profit you make on each sale, and is an important indicator of the profitability of your business. The cost of goods includes all direct expenses connected with acquiring the item, such as the purchase price, customs duty and freight, but excludes value added tax (VAT). By understanding and calculating the mark-up, businesses can set the right price for their products and services so as to secure a good profit.
How do you calculate the mark-up?
Let us say that you run a clothes shop and sell a jacket. The purchase price for the jacket from the supplier is NOK 500, and you sell it for NOK 1 000.
Mark-up in kroner = 1000 – 500 = 500 kr
Mark-up in per cent = 500 / 500 = 100 %
The mark-up is therefore calculated on the purchase price. It is easily confused with the gross margin, which is calculated on the selling price: in the same example the gross margin is 500 / 1000 = 50 %. The same amount in kroner thus gives a mark-up of 100 % and a gross margin of 50 %, and the two figures must not be mixed up.
Why does the mark-up matter?
The mark-up helps businesses understand how much they earn on each unit sold, and is therefore critical for setting the right price. A high mark-up means that you have a good margin between your costs and the selling price, which gives a higher profit per item sold. A low mark-up indicates that your costs are close to the selling price, which gives less profit.
Using the mark-up in pricing
In order to use the mark-up to set prices, you first have to calculate the total cost of acquiring the item or producing the service. This includes the cost of raw materials, wages to employees, and other relevant expenses. You then decide the mark-up percentage you want and add it to the acquisition cost in order to arrive at the selling price. A mark-up of 100 %, for instance, means that the selling price becomes double the purchase price.
Read more about how the key figures in Capassa keep the mark-up up to date automatically.
More terms in profitability and key figures
See all →Gross profit
The difference between sales revenue and the cost of goods sold, before other operating costs are deducted.
Operating margin
The share of revenue left as profit after operating costs, expressed as a percentage.
Contribution margin
How much each unit sold contributes towards covering fixed costs, once variable costs are deducted.
ROS (return on sales / net profit margin)
The share of revenue that ends up as net profit, after all costs.
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