## Mark-Up vs. Margin – Whats the difference?

There’s a huge difference. Although the two terms are sometimes used interchangeably to mean gross margin, that mistake can result in a major difference on your bottom line. Mark-up and profit margin are not the same!

Understanding and applying the two measurements within a pricing model can mean a dramatic difference on your bottom line

**Let’s look at the definitions: **

**Mark-up **or Mark-up percentage is the percentage difference between your cost and your selling price. It can be expressed as:

Mark-up {**MU**} % = (Sell Price {**SP**} – Cost {**C**}) / Cost {**C**}

*or:*

**C*** **MU%** + **C** = **SP**

**Gross Profit Margin** or Margin percentage is the percentage difference between your selling price and your profit. It is expressed as:

Gross Profit Margin (**PM**) = {Sell Price (**SP**) – Cost (**C**)}/Sell Price (**SP**)

*or:*

Gross Profit Margin (**PM**) = Profit (**P**) / Sell Price (**SP**)

**Net Profit Margin, **also referred to as Profit Margin, shows how much you retain in earnings for every dollar that you make from sales. The calculations are similar to Gross Profit Margin above, except that Net Profit looks at your revenue *after* deducting expenses. We will not be examining this further in this article.

You can see from the equations above that Mark-up is based upon your *cost*, while Margin is based upon your *selling price*. Mark-up adds a percentage to what you paid for the product, and Margin shows how much you’ve profited on the sale.

Using the above calculations, you can see that you will arrive at very different results depending on the tool used.

###
**Example**:

If an item costs you $10.00 and you add 25% Mark-up, you will sell it for $12.50 {$10.00 * 25% + $10.00 = $12.50}.

That same sale results in only a 20% Profit Margin {($12.50 – $10.00) / $12.50}.

**What Difference Does It Make?**

Your dollar profit is still $2.50 per sale, but for the purposes of accounting, business planning, and determining your pricing structure, it’s important to understand the entire picture.

Your accountant and any potential buyers for your business will be looking at Profit Margin. This focus is upon the return that your business provides for each sales dollar collected. It is a measure of your profit that is based upon your revenue. Since it does not take into account your expenses, it’s not a good indicator of your overall profitability (for this they will look at Net profit Margin, mentioned above).

Some of your suppliers may focus upon Mark-up. This is easier for them, since it deals with the number that concerns them – your cost (their selling price). Remember Mark-up is based on your cost; it does not mean you are realizing that percentage of profit. In the above example, if your supplier recommended a 20% margin on her product, your actual Margin is only 16.67%! This pricing may work out well for your supplier, but it probably is not in your best interests.

On a macro level, if your store purchased $1,000,000 in goods for resale per year, the difference between calculating your selling prices based on 20% Mark-up and 20% Margin is $50,000! That’s a lot of money that could go directly to your bottom line.

This chart shows how Mark-up and Margin percentages relate:

**Considerations**

Because profit margin can vary widely annually or even seasonally, it’s important for a retailer to keep track of his profit margin. Don’t assume increased sales revenue equals increased profitability. Many companies see increases in sales only to find that they’ve become less profitable.

So how do you maximize your profits? This decision is ultimately going to be based on: consumer demand, market pricing, competitive activity and your own business model, based on the particular needs of your specific store.

When calculating a product’s mark-up, keep in mind what the market will bear. If the preferred mark-up places the product out of the market’s current pricing range, take another look at the product’s cost structure.

Also, remember gross margin is only a starting point to determine your profitability; always look at your net profit margin for a clearer picture of where your store stands financially.

Help – I know my 2 elements for my pricing – COGs and required MARGIN. What is the formula to get the MARKUP from that example.

e.g. – COGs 5.00 and required MARGIN is 40%. Sell price is 8.33. What is the calculation to get the MARKUP from this example?

Thank you for your assistance.

Kevin W

Hi Kevin:

Thanks for your comment.

The formula for your calculation is:

COG / ((100% – Required Margin %) /100%)

In your example that would be:

$5.00 / ((100% – 40%) /100%)

$5.00 / (60%/100%)

$5.00 / (0.60) = $8.33

Or, more simply:

COG / (1 – Required Margin % expressed as decimal)

$5.00 / (1.0 – 0.40)

$5.00 / (0.60) = $8.33

I hope this helps.

Best wishes,

Tom McHugh

Sorry Kevin:

I never answered your real question. To find the MARKUP use this:

COG * (1.0 + (MARGIN / (100% – MARGIN))

$5.00 * (1.0 + (40% / (100% – 40%))

$5.00 * (1.0 + (40%/60%))

$5.00 * (1.0 + 0.667)

$5.00 * 1.667 = $8.3

Tom