One of the terms you'll often run in to if you're a regular reader of EVE Trading Blogs or the MD Forums is "margin". I know I did. I paid special attention to this every time I read it, because I used other people's margins as benchmarks for how well I was doing in my own trading. If someone had a better "margin" than I did, then I would read to see what they were doing, and tried to apply that to my own trading.
Naturally, I tried to improve my trading by creating a spreadsheet to help me calculate my margins quickly. I'm pretty good at doing calculations in my head, but when it's late at night, or when I have just a few minutes to spare and I'm looking for a quick deal, I miscalculate things. So a spreadsheet was a big help.
However, I noticed that I wasn't getting really good margins, at least not compared to what others were reporting. One day, one margin didn't make any sense at all. I had bought an item for 5M and sold it for 12M, but my margin was reported as 58%. My margin should have been over 100%, since I sold it for more than double what I paid for it. How's that possible?
It's because while I was calculating margin correctly, I was thinking markup.
The profit margin is the ratio of profits vs revenue. In other words, it tells you how much of your revenue is actually profit (the difference is cost). The markup on the other hand, is the ratio between revenue and cost. It's very common for people to confuse the two, not just in EVE, but in real world business.
If we revisit the example above, here are the numbers:
Margin = (7,000,000/12,000,000) * 100 = 58.3%
Markup = ((12,000,000 / 5,000,000) - 1) * 100 = 140%
In most cases, it won't make much of a difference if you refer to markup as margin in an EVE-related trading discussion, people are all thinking the same thing. However, if you start setting up spreadsheets or other tools, or you start reading real-world financial text books to improve your EVE trading, it's very important to distinguish the two concepts.
No comments:
Post a Comment