Mark Up vs Margin
This is probably one of the most important aspects of knowing your numbers due to the dramatic effects on your overall business profitability.
Here we will define Mark Up and Margin, which is common measures businesses use to assess financial performance or assess a project’s viability.
Markup is the percentage of the profit that is your cost. To calculate markup subtract your product cost from your selling price. Then divide that net profit by the cost. To calculate margin, divide your product cost by the retail price.
But there’s a lot more to know about markups and margin. You’ll want an easy way to calculate both on the fly, and you’ll want to understand both the difference, but also how they relate to each other.
Mark-up is your Gross Profit figure expressed as a percentage of the cost of goods sold price.
Markup, broken down as simply as I can state it, is what percentage of the profit your cost is. If something costs £1 and you sell it for £2 then you have £1 of profit. Since both your cost and your profit are £1, that’s a 100% markup.
In other words, you simply doubled your cost to come up with your retail sales price.
Margin is your Gross Profit figure expressed as a percentage of the selling price.
Margin, while similar and related to markup, is altogether different.
If the markup is the percentage of the profit is of the cost, the margin is what percentage of the sales price the profit is. So in a way, it’s the same thing in reverse.
Again if you buy something for £1 and sell it for £2, we know that’s a 100% markup. But for margin, since we marked up the price by £1, and we sell it for £2, the profit ( £1) represents exactly half of what we’re selling it for. Or a 50% margin.
See example and calculations below:
How much do we mark it up to get to a 40% margin?
Simply take 100-40 (for the 40% margin). Then express that answer as a decimal (.6%). Now divide your cost (£1.00) by that .6%. The answer is £1.67. That is the retail price you should sell a product for if you bought it for £1.00 and want to make a 40% margin.
Want a different margin? Do the exact same math substituting your target margin where I used the 40?
As you can see, there is a dramatic difference in profitability between markup and margin, so let’s dig a little deeper.
Below is the formula for calculating the margin:
Below is the formula for calculating markup:
