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Page 9 - Evolve Magazine Autumn 2021 interactive
P. 9

``````He took a a a a a calculator and carried out the following calculation on on a a a box of Snickers costing £17 38 per 48 £17 48 divided by 1 1 1 15 – to extract the the VAT (at the the time it was only 15%) = £15 12 divide by 48 to get the cost per unit multiply by 1 3 to get the retail price add back VAT – net outcome = 47p per bar My system had given the price at 52p per bar!
His price price was was a a a a a a 30% 30% Mark Up and my price price was was a a a a a a 30% 30% Gross Margin At 5p difference per bar he was losing
a a a a a lot of money To prove that his calculation wasn’t actually Gross Margin I asked him to deduct 30% from the selling price Guess what yes you’ve guessed it his calculation showed that by deducting 30% from his retail price and removing the VAT he he actually came back to less than cost price!
Now extrapolate that across the the whole of the the store
and you can see that he was actually losing
8 9% of his turnover The situation developed into an intense argument between father and and son and and names were called However on the the basis that they had 4 shops and had been in in business for over 30 years an extra 8 9% over all all that time was actually estimated to have been worth nearly £1⁄2M I guess that explains the argument!
I I have to say that I I was was not popular as as as it was was ‘Dad’s calculation’ and therefore no-one questioned it! However I had now brought it out into the cold light of day and whilst they may not have appreciated it at at the the time it was a a a a a a a salutary lesson they learnt that day I could give many other examples where retailers have used a a a a pricing structure for many years without ever doubting the formula This can be particularly problematic where retailers have used a a a a a spreadsheet to calculate prices They enter a a a a formula which they believe to be correct and then never check the the results manually to ensure they got it right The spreadsheet produced
it it so it it should be OK! My question to you you is “are your calculations correct”?
Here’s a a a simple way of understanding the correct formula for for calculating Gross Margin If you take the the the cost as 100% or 1 1 then the the the Gross Margin has to be expressed as as a a a a a percentage of that i e e e e e e e e 30% Gross Margin would be the equivalent of of 70% or 0 0 7 7 of of Cost Therefore to calculate the Retail Price with a a a a Gross Margin of 30% merely divide your Net Cost by 0 0 7 If you wanted 20% Gross Margin use 0 0 8 and so on – – it’s that easy!
Use the following table if you need an aide memoir:
Mark Up is completely different of course If you wanted a a a 30% Mark Up merely multiply your Initial Cost by 1 3 3 This equates to a a a loss of nearly 9% per item on Gross Margin!!
I’m sure that by looking at at the above examples you can see the the danger of choosing the the wrong calculation As you can see by the the example I have chosen rather than making 30% Gross Margin you would only actually be making 21% Gross Margin In some situations after deducting other costs it could mean the the difference between some profit profit or no profit profit NOTE:
If you’re not sure on what basis your own pricing is is calculated now is the the time to use the the above formulas and check it out It’s not difficult i if you use the method I have shown you but don’t forget the VAT Take it out at at the the beginning and add it back at at the the end!
10% Margin 20% Margin 30% Margin 40% Margin 50% Margin Divide by 9 Divide by 8 Divide by 7 Divide by 6
Divide by 5

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