Is there a difference? Absolutely. Markup and margin are related, and often used interchangeably, but the accounting for margin and markup are two distinct ways of analyzing the same transaction.
A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Markup percentage is the difference between the cost of goods sold (COGS) and the selling price, while margin percentage is the difference between the selling price and the profit.
While the inputs are the same, the key difference is that markup is based on cost, while margin is based on the selling price. We’ll show how markup vs. margin produce distinct outputs and how they can be used properly.
Markup vs. Margin
Businesses use markup when pricing goods or services to ensure they cover costs and earn a profit on goods sold. A key component of pricing strategy, markup is the percentage added to the cost of a product to determine its selling price, and focuses on profit as a proportion of cost.
For that same sale, businesses and investors use profit margin to measure the percentage of selling price that’s kept as profit after covering all costs and expenses. A key measure of financial health, margin focuses on profit as a proportion of revenue (selling price) and indicates how efficiently a business converts sales revenue into actual profit.
| Markup | Margin | |
|---|---|---|
| Calculated on: | Cost | Selling price |
| Used for: | Pricing strategy | Financial health |
| Value: | Always larger than margin | Always smaller than markup |
| Perspective: | Seller-centric (cost focus) | Customer-centric (price focus) |
Because markup is based on cost, and margin based on selling price, markup is always larger than margin. Since the selling price includes the profit (markup) in addition to the cost, the denominator for margin is always larger than the denominator for markup.
When trying to optimize profitability, it’s a mistake that if a product or service is marked up 25%, the result will be a 25% gross margin on the income statement. A 25% markup rate produces a gross margin percentage of only 20%.
Let’s look at how markup and margin are calculated to illustrate this key difference.
Margin vs. Markup Calculator
Markup is based on cost and helps set prices.
Margin is based on selling price and measures financial health.
How to use: Enter your cost and selling price to determine current markup and margin percentages, or enter your desired markup and margin percentages to calculate the optimal selling price.
Input Values
Results
How to Calculate Markup Percentage
The markup percentage calculation is (cost X markup percentage), added to the original unit cost to arrive at the sales price.
If a product costs $100, the selling price with a 25% markup would be $125:
| Measurement | Formula | Value |
|---|---|---|
| Gross Profit Margin | Sales Price – Unit Cost | $125 – $100 = $25 |
| Markup Percentage | Gross Profit Margin/Unit Cost | $25/$100 = 25% |
| Sales Price | (Cost X Markup Percentage) + Cost | ($100 X 25%) + $100 = $125 |
How to Calculate Gross Margin Percentage
Gross margin defined is Gross Profit/Sales Price. In the previous example, the gross profit is $25. This results in a 20% gross margin percentage:
Gross Margin Percentage = Gross Profit/Sales Price = $25/$125 = 20%.
To reach a desired gross margin, you can use the inverse of the gross margin formula to determine sales price.
By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.
For example, if a 25% gross margin percentage is desired, the selling price would be $133.33 and the markup rate would be 33.3%:
Sales Price = Unit Cost/(1 – Gross Margin Percentage) = $100/(1 – .25) = $133.33
Markup Percentage = (Sales Price – Unit Cost)/Unit Cost = ($133.33 – $100)/$100 = 33.3%
You can also use our profit margin calculator if you’d like to speed up this process.
When to Use Markup vs. Margin
Properly understanding how to apply markup vs. margin is critical for growing businesses to achieve optimal scalability and profitability.
Markup calculations are best used for setting a competitive pricing strategy, while margin calculations are critical for financial reporting and monitoring the health of your business.
If you have challenges in finance and accounting, or are struggling to get meaningful insights from your financial reporting, Consero can help. We combine best-in-class, tailored solutions and decades of combined expertise to turn your finance function into an asset. Request a complimentary consultation to learn more.
