Wednesday, October 26, 2005

Futzing the numbers?

PAul Martin's latest Style & Substance, the writing and editing newsletter for the Wall Street Journal, raises not only an interesting numeracy point but, for me, an interesting editing/ethical question, too.

As Martin writes:
In retailing, as we have preached, a 100% increase from cost is really a 50% markup. Retailers divide the difference by the selling price, rather than by the buying price, to determine the markup or gross profit.
Now, the Journal, focused on the business communtiy and its conventions, may have to follow this reasoning. But I wonder about whether ethically most of us should do this when I'll bet you that is not the way the public interprets things. If I pay you $80 for a vacuum you've bought for $40, you've doubled your money. That's a 100 percent profit to my mind -- and I'll bet to yours, too, unless you're in retailing.

Is this a case of letting the source redefine the terms in a way most favorable to it (like when Bush wanted to rename them "homicide bombers")? Should we follow what appears to be a little numerical sleight of hand?

Perhaps there is good reason in the retail trade for this accounting convention. I don't know. I'm not an expert on retail accounting, but there are people around the corner from me at USC's Center for Retailing who are, and I intend to ask them as soon as possible. I'll update if I get a better explanation for why this is done, but it still may leave open the question of industry convention vs. widespread interpretation. (This comes into play in other cases, for instance when we say something is "five times fewer," which is a logical and physical barrier (past one time it's all gone), but is becoming more widespread.)

Martin notes that one way to work around that gross profit definition would be to say -- in the case of a doctor getting reimbursed $109 for a $30 skin biopsy -- the doctor is reimbursed "at more than three times his cost." But there are limits as to how much you can do that.

An update from Deborah Fowler, head of USC's Center for Retailing:
I think it is just a historical practice, not a manipulation. It is a very simple way to teach people how to figure mark-up.

There are actually two ways to figure mark-up, one on cost and one on retail. Furniture dealers usually figure mark-up on cost, other retailers on retail.
Mark-up on retail is mark-up/retail
Mark-up on cost is mark-up/cost
For instance if you purchase an item for a retail store or $50 and "keystone" the item, the cost becomes $100 (keystone is twice the cost) = a 50% mark-up.
If you purchase the same item and sell it for $100, but figure retail on cost, the mark-up is 100%. It is just simply the way you (the retailer) look at mark-up.

From Doug
Thanks, Deborah.

I guess as a journalist it still concerns me. I'm betting that if you went out on the street and asked 20 people what the markup is on something from $10 to $20 they'd tell you 100 percent. Is it a case of twisting things in the retailer's favor? Maybe not. But it is ambiguity. And just as we resist attempts by other institutions to shape the language and facts to their liking (think "homicide bomber" instead of "suicide bomber" and the reactions that brought), it's at least incumbent on us, if we are going to use industry jargon/standards like this, to explain how they differ from most people's common perceptions.

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