CALCULATING CHARGE RATES – MARGIN VS MARKUP: THEY’RE NOT THE SAME!

It may seem that I’m highlighting a glaringly obvious point here, but the fact is I am continually astounded by the lack of understanding of this concept – particularly in…

It may seem that I’m highlighting a glaringly obvious point here, but the fact is I am continually astounded by the lack of understanding of this concept – particularly in the contracting and recruitment industry.

Failure to price products and services with a sufficient markup and margin can seriously impede a business’ financial success.

Rate Transparency

Whether strategic or otherwise, finding a recruitment company with transparent rates is becoming far more uncommon these days.

Recruitment in Australia is a fast paced and high turnover industry; so it’s not unfair to state that, for the most part, many recruitment consultants are unaware of the strategies and calculations behind margin and markup setting. The reality is, they are guided by business guidelines for what margins they apply on contracts.

These days (whether purposely or not), companies are quite shrewd in the way they lay their contracts out.

As the old adage goes, the devil is in the detail. Now, whether you are a client needing a candidate, or a contractor being engaged to work with a client; not knowing how to translate the finer details of a contract is an easy way to trip you up.

Margin vs Markup in Recruitment

For recruiters, a tremendous amount of work goes into making a placement. Knowing the difference between margin and markup is critical.

Having a markup that is too high can result in a loss of clients. Too low, and it could cost your business.

The difference between the two is what will impact your business profits.

What is a Markup?

Simply, a markup is the amount added on to the base cost of a product or service to make a profit. Putting a markup on your product means that you make a profit on sales, by selling it a higher price than what it cost to create it.

Markup is most commonly conveyed in percentage form. This offers consistency in creating a comparative amount of money regardless of the costs of your products, whether up or down.

Now similarly, in recruitment, a markup is percentage added to a contractor’s daily fee payable to the recruitment company.

As an example, if your contractor has a daily charge rate of $200.00 and your company markup is 15%. Your client daily charge rate is then equal to $230.00, giving you a markup fee of $30.00.

Markup

The daily charge rate to your client can be calculated as such:

Client Charge Rate

Now, if you are a client wanting to know what the agency markup is, this can be calculated as such:

Client Charge Rate (1)

As you can see, the markup is a crucial figure in your recruitment business calculations as this number determines your actual charge rate.

What is a Margin?

Margin is the percentage of the final selling price. In the case of recruitment, it is the percentage of final client charge rate.

Unfortunately, I have seen many businesses make the mistake of calculating client charge rates using markup; mistakenly assuming that the markup percentage is the ultimately their GP margin.

Taking the contractor charge rate plus the agency fee, the margin is the percentage of total client charge rate.

Using the same example above – if your contractor has a daily charge rate of $200.00 and your business requires a minimum of a 15% margin to make a profit; your client daily charge rate is then equal to $235.30.

Margin (1)

Based on the desired margin of 15%, the daily charge rate to your client can be calculated as such:

Client Charge Rate (2)

Margin or Markup – What Should You Use?Thinking woman in glasses looking up with light idea bulb above head isolated on gray wall background-1

Looking at the examples above, 15% Margin Vs 15% Markup on a base rate of $100.00 – the difference in dollars and cents is quite stark; and is hugely critical for your business.

For businesses, using margin to calculate your selling price is more beneficial and advisable. Doing so accurately measures the profit of sales.

It is important to identify your business’ desired profit margin and from there, calculate the client charge rate or selling price.

Contact us today for an easier way to calculate rates, whether it is using margin, markup or a fixed dollar value. We have it at a touch of a button within Ratescalc! 

 

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