Markup vs. Margin
What is the Difference? Is there a difference?
Absolutely!
These two terms are often used interchangeably by folks
that do not value accounting skills. However, that misunderstanding can menace
of the bottom line of your enterprise. A solid understanding and application of
these two separate concepts can enhance our pricing model, and have a drastic
effect on the bottom line.
- markup percentage is the percentage difference between the actual cost and the selling price.
- gross margin percentage is the percentage difference between the selling price and the profit.
Photo credit: Simon Cunningham
Mark up reflects your cost. Margin reflects your price.
Gross margin or gross profit is defined as sales minus
cost of goods sold. If a retailer sells a product for $10 which had a cost of
$8, the gross profit or gross margin is $2. In our example the gross margin
ratio is 20% ($2 divided by $10).
In our example, the product had a cost of $8 and it had a
markup of $2 resulting in a selling price of $10. The $2 markup is the same as
the $2 gross profit. However, the markup percentage is often expressed as a
percentage of cost. In our example the $2 markup is divided by the cost of $8
resulting in a markup of 25%.
Many people have a problem with accountants’ jargon and
often get confused between the terms “profit margin” and “markup” which are
often bandied about freely or used interchangeably. Although these two terms
are used to express different things, they are also, in fact, two different
ways of analyzing the cost and profit of a product or service in your small business.
“Profit” is the difference between what you sell it for
and what you paid for it. “Margin” simple means you turn that into a percentage
of the selling price. You do this so you can compare different items easily.
So the difference is that markup is your profit as a
percentage of the cost price and profit margin is your profit as a percentage
of your selling price.
For additional information and insight into the
fascinating and powerful realm of prices, check these two research-based
resources:
