Markup and Margin

In the past week, I have had discussions with three different people on the difference between markup and margin. In my own experience, I have come across a number of business owners who thought they had a margin of a certain percentage but they actually had a markup of that percentage. There’s a big difference and understanding this could be the difference between making or losing money.

So, just in case there’s anyone reading these who is unsure about the difference, here’s a brief explanation. If you already understand this, skip this post!

Lets assume we buy an item for € 8.00 and sell it for € 10.

The difference between the selling price and the buying price is € 2. We can call this either the gross profit or the gross margin or the markup. It’s a number and not a percentage. So when you are talking about the absolute amount of money markup and margin are the same.

However it is when you start talking percentages that they are different and this is why people get confused.

The gross margin percentage is the margin divided by the sales price and expressed as a percentage. In our example, the margin % is 20% or 2/10.

The markup percentage is the margin divided by the cost price and expressed as a percentage. In our example, the markup % is 25% or 2/8.

The problem arises because most people don’t say the word percentage when they are talking about either the gross margin percentage or the markup percentage. You will often hear people say they have a margin of 20% or they will say they have a markup of 25%. We know from the context that they are talking about percentages and that’s when you have to be careful.

Margin % is always on sales and markup % is always on cost.

I think of it this way. Margin % measures how much of your selling price can you drop before you hit cost. So margin relates to selling price. Markup % is how much of your cost do you add on to get your selling price. So markup relates to cost.

Here are a few more examples

Buy Sell Margin % Markup %
3 6 50% 100%
4 6 33% 50%
4 5 20% 25%

 

They’re big differences.

As always, if you have any questions, feel free to send me an email at jim (at) accountsplus (dot) ie.

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