Margin and Markup and two different things!

I know they both start with “M” and they both are used pretty frequently together.  Other then that, they have entirely different meanings and one can hurt the other.

Margin: The percentage margin is the percentage of the final selling price that is profit.

Markup: A markup is what percentage of the cost price you add on to get the selling price.

When applying these two definitions to a pricing module, they rarely ever have the same numbers.  So a selling price with a margin of 10% results in more profit then a selling price with a 10% markup.

A better understanding would be to say that a 50% margin means that half of the selling price is profit.  Markups on the other hand, a 100% markups means that you doubled the cost to come up with a sales price.  If it cost you $10, and you are selling it for $20, that is a 100% markup.  With margins, the only way to achieve a 100% margin would be if that the cost was $0.

Formulas:

Margin = ((Revenue – Cost of Goods Sold) / Revenue) * 100

Markup = (Sales Price / Cost) * 100

Typically companies like to apply a hard bottom number to margins.  There are many expenses outside of the typical cost to purchase a good; overhead, supplies, licenses, fees, etc.  So by assuring a minimum margin, these outside costs are always sure to be covered.  Markups are generally used for benchmarking purposes.  These are not often used when dealing with the finances of a company, but rather for creating competitiveness or pricing structures.

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