Margin vs markup calculation for wine

Imagine it's the middle of March, and you've just bottled up a beautiful batch of your finest wine at your winery. 

Now, you're faced with a critical question: How do you price it? If your price is too high, sales will be too slow. But if your price is too low, you might not generate the profit you anticipate.  

In other words, In order to generate your desired margins, you have to find the appropriate markup.

Let’s define those two crucial terms—markup and margin.

Margin

• Margin is the difference between the selling price of a product and the cost of the product.

• Margin is usually expressed as a percentage of the selling price.

• Think of it as the profit you make on a product after covering its cost.

For example, if you sell a wine for $40 and it costs you $10 to make it, your margin is $30.  This margin is often referred to as “gross profit margin.” 

As a percentage, the margin would be 75% of the selling price ($30/$40). This is often referred to as “gross profit margin percent” or GPM%.

Note:  The word “gross” is added here to distinguish this margin from your net profit margin.  Gross margins are calculated using only the selling price and the cost of goods sold.  Net margin calculations include not just your cost of goods sold but also your overhead and operating expenses.

Markup

• Markup is the amount you add to the cost of a product to determine its selling price.

• Markup is usually expressed as a percentage of the cost.

• Think of it as the extra amount you add on top of the cost to make a profit.

Using the same example, if a wine costs you $10 to make and you sell it for $40, your markup is $30. As a percentage, the markup would be approximately 300% of the cost price ($30/$10).

This is a bit confusing because intuitively it seems like if the wine costs $10 to make and you mark it up 300% you would come up with a $30 selling price. 

However, the $30 is the amount you need to ADD to the cost, not the final price. With a 300% markup the final cost is not $30, but $10 + $30 = $40.

To summarize:

• Margin $ = Selling Price - Cost

• Margin % = (Selling Price - Cost) / Selling Price

• Markup % = (Selling Price - Cost) / Cost

Using margin and markup to calculate sales price

Margin and Markup are interrelated.  Once you know your desired margins, you can calculate your desired markup.

Then, once you know your desired markup, you can use this figure to calculate benchmark pricing.

For a new example, say it costs you $15 to produce your signature Cabernet Sauvignon.  Your goal is to generate a 70% margin on DTC sales.  That means your selling price will need to be $50.  This is what the formula looks like once it has been transformed to solve for the selling price:

• Selling price = Cost divided by (1 - margin %).

In other words, the selling price of $50 is the cost of $15 divided by 30% or .3 (1 - margin %).

In terms of markup, this is equivalent to a 233% markup ($35/$15).  Now, you can see that to get a 75% margin, you will need to have a 233% markup.  This means that for a wine that costs $10 to produce, you will need to mark it up approximately $23 for a final retail price of $33.  For a wine that costs $12 to produce, you will need to mark it up approximately $28 (233% x $12) for a final retail price of $40.

Once you have your markup % in mind, this is the formula you can use to calculate selling price:

• Selling price = Cost + (Markup % x Cost)

What is a good markup and margin for wine?

Your sales channel is one of the biggest factors in naming an “ideal” margin for wine.  You simply can’t get the same margins in distribution/FOB markets as you can in DTC sales.  That said, you need to work out a model for your particular case and business strategy.  

Your operating and overhead expenses will also play into what kind of gross margins you need.  If you have a tasting room and high staff costs, you will need higher margins to cover those costs.  If you have a streamlined model without a lot of staff or overhead, you can get by with lower margins.
As a general guide, take a look at this chart that our friends at Innovint put together for benchmarking margins:

Please keep in mind that these margins assume full-absorption costing. If you do not include overhead, facilities, labor, and depreciation in your costing calculations, your margins will be higher than those on this chart.

That is fine because with this accounting framework, your books will show more operating and overhead expenses, and you will need those higher gross margins to cover the proportionally larger amount of expenses. You will have to examine your own business model to make sure that your margin goals work for you.

We recommend working closely with your winery accountant to help ensure your pricing strategy hits the mark. And remember, pricing isn't a one-time decision. You'll need to keep an eye on both your gross and net profit margins and adjust your pricing strategy as needed to stay competitive in the wine market.

If you need extra help in this area, we're always here to help. You can book a call with our team by heading over to our Getting Started page. 

Until next time.