Difference Between Margin vs Markup
The relationship between price, margins and cost and the way in which these are calculated have helped in developing the concept of margin vs markup. It all begins when you decide to price your product. The cost will be determined if you are buying the products in bulk or buying individually from vendors at different rates. The cost at which you purchase your products help in determining the price, this is where the concept of markup vs margin is used. A clear understanding of these concepts can have a huge impact on the underlying.
Head To Head Comparison Between Margin vs Markup (Infographics)
Below is the top 9 difference between Margin vs Markup
Key Differences Between Margin vs Markup
Both Margin vs Markup are popular choices in the market; let us discuss some of the major Difference Between Margin vs Markup
- Margin refers to the profit earned on the sales. The margin is calculated as the difference between sales and cost of production. This is the gross profit margin for that particular transaction and is expressed as a percentage of the selling price. The markup, on the other hand, refers to the amount added to the cost price to cover the expenses and profit. It is mainly the difference between the cost price and selling price.
- Gross margin is when you know both the selling price and the cost price and want to calculate the exact amount of profit.
It can be calculated by using below’s formula
Gross Profit Margin = (Selling Price – Cost of goods sold)/ Selling Price
The amount added to cover the expenses and the overheads like labor cost, taxes, material to earn a profit is called as markup.
Markup can be calculated us by using below formula
Markup = (Selling Price – Cost) / Cost
Markup = (Selling Price / Cost) – 1
- As the business grows older the user of margins increases. Margins help in determining the actual profits made on the sale. Markup is used to ensure that revenue is earned on each sale. Markup is good for understanding business and makes the user aware of the costs
- The margin is given as a percentage of sales on the other hand markup is termed as a cost multiplier. The base for margin is selling price whereas base for markup is cost
- Consider this example for calculation of Margin vs Markup. You are selling books and the cost of each book is Rs 150 and you sell your books at Rs 200.
Gross Profit Margin Calculation
To first find the gross profit we will have to deduct the cost from the price.
- Gross Profit = Rs 200 – Rs 150
- Gross Profit = Rs 50.
To calculate margin we will divide gross profit by revenue
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- Margin = Gross Profit/Revenue
- Margin = 50/200
- Margin = 0.25
- Margin = 25%
25% margin means that you keep 25% as revenue and spend 75% as cost. The higher the margin the higher the profit you are making.
Markup Calculation
Using the above calculated gross profit in the numerator, the markup is calculated as
- Markup = 50/150
- Markup = 0.33
- Markup = 33%
Markup of 33% means that you have sold the books at a price 33% higher than the cost
- The margin is important from a sellers point of view while markup is important from the perspective of the buyer. For a successful business, markup should always be higher than the margin
- The relation between the margin and markup can be given with the following equations
Margin = 1 – (1/ markup)
Markup = 1/(1- gross margin)
- Many mistaken that a 25% markup means a 25% margin on the income statement. However, a 25% markup means a 205 margin. Margins and markups go hand in hand and interact in a predictable manner. Each markup corresponds to a margin. Below is a calculated sample chart
|
Markup |
Margin |
| 15% | 13% |
| 20% | 16.7% |
| 25% | 20% |
| 30% | 23% |
| 33.3% | 25% |
| 40% | 28.6% |
| 100% | 50% |
Margin vs Markup Comparison Table
Below is the 9 topmost comparison between Margin vs Markup
| The Basis Of Comparison Between Margin vs Markup |
Margin |
Markup |
| Meaning | The margin is the percentage profit earned on the total sales. It is calculated as sales minus cost of goods sold and is the proportion of income earned over sales | Markup is the amount by which the cost of the product is increased to derive at a selling price |
| Formula | (Selling Price – Cost of goods sold) / Cost of goods sold
|
(Selling Price – Cost of goods sold)/ Selling Price |
| Formula Meaning | The margin is the difference between selling price and the profit. Margin can be gross profit margin or net profit margin | Markup is the percentage difference between the cost and selling price of the product |
| Use | As the business grows older the user of margins increases. Margins help in determining the actual profits made on the sale | Markup is used to ensure that revenue is earned on each sale. Markup is good for understanding business and makes the user aware of the costs |
| Basis for calculation | The basis for margin calculation is revenue or price | The basis for markup calculation is cost |
| Calculation | Margin should always be lower than markup | Markup should always be higher than the margin |
| Definition | Percentage of the selling price | Cost Multiplier |
| Perspective | The margin is from the perspective of a seller | Markup is from the perspective of a buyer |
| Relation | Margin = 1 – (1/ markup) | Markup = 1/(1- gross margin) |
Conclusion – Margin vs Markup
Knowing the difference between Margin vs Markup helps in setting goals for the company. If you know the amount of profit you want to achieve in a particular month then prices can be set according to the margin vs markup formulas. If one is not aware of the margins and markup formula then it is not possible for them to estimate the prices and cost of goods sold correctly which will lead to losing out in profits.
It is important to understand which function to use when. Markup is necessary to ensure that your business is making profits and covering all the costs, Markup is necessary for the beginning stage to understand the performance and understand the costs closely. As and when sales develop and volume increases it is necessary to look deep in the figures and understand if the margins are increasing
Even after the business grows both these ratios can be used in parallel to understand the cost and the price impact. It should also be noted that for a successful business it is necessary that the markup is always greater than the margin.
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