Calculating markup: Take the sales price minus the unit cost incurred. Then divide the outcome number by the unit cost and multiply the amount by 100. The number at the end is our markup price.
Calculating margin: Take the retail price and subtract the cost of the product or COGS from it. Then divide the post-subtraction amount by the retail price and multiply it by 100. This determines our retail margin.
What are Mark-up and Margin?
Markup and margin are two ways of pricing products and services. Markup is the amount added to a product’s selling price after deducting the cost of goods sold from the revenue incurred. Margin is the leftover amount or profit after account for the costs incurred.
Mark up is usually expressed as a percentage of the cost, while margin is usually expressed as a percentage of the selling price.
Businesses use markup to cover their costs and make a profit but use margins for planning purposes and decision-making. For example, a company may want to maintain a certain margin to be able to afford advertising or expansion plans.
Factors that differentiate Mark-up and Margin
Mark-up and margin are two different ways of expressing how much profit a company makes on the sale of a product. Mark-up is the percentage of the selling
price that is added to the cost of the product. Margin is the percentage of the selling price that is profit.
To calculate markup, the selling price should be divided by the product cost. To calculate margin, simply subtract the cost of the product by the selling price, divide the outcome amount by the cost of the product, and multiply it by 100.
Calculating markup is easier and doesn’t require knowing your costs upfront but it can lead to inaccuracies if the costs keep changing over time frequently. The margin on the other hand is more accurate but can be difficult to calculate without knowing your costs beforehand.
How to Calculating Markup and Margin?
The following terms are necessary to be understood by businesses with clarity when calculating the margin for their business. These terms are:
Revenue: Revenue is the profit earned after selling certain products or services. Revenue is the money made before any deductions are decided for a particular amount.
Cost of Goods Sold: it is the cost expended when producing any product or service. It includes items, such as direct raw materials, packaging, and labor, along with a few others.
Gross Profit: The gross profit is the leftover revenue after eliminating the expenses incurred for manufacturing and delivering products or services.
Formula for determining margin is:
Margin = (Revenue – Cost) / Revenue
Let’s use this formula as an example for better understanding:
If the retail price is $4 and COGS is $2, then calculate the margin as well as margin %
[($4 – $2)/4] = 0.5 (margin)
Multiplying 0.5 by 100 we get 50% (margin %)
Markup is similar to margin only in terms of calculating the profit of a sale. In the simplest of terms, it’s a percentage businesses add to their cost of production when pricing their goods for sale.
Markup, unlike profit margin, doesn’t utilize gross profit as a function of revenue, but as a function of a business’s cost of product or goods sold.
The formula for markup is: (Revenue – Cost of Goods Sold) / Cost of Goods Sold Let us use an example to better understand how the formula works:
If the unit cost is $100 and the selling price is $125, calculate markup and markup %
($4-$2)/2 = 1 (markup)
Multiplying 1 by 100, we get 100% (markup %)
Markup or Margin: Which metric is more effective?
The biggest struggle companies and start-ups face when further trying to improve their profitability is price management and markup and margin happen to be two of the most important methods companies utilize when putting a price on their products.
Markup is used in determining the sales price of retail products which mostly include commodity and consumable items and margin describe the profit earned on a product as a percentage of the selling price.
However, as the markup is heavily influenced by market forces, it doesn’t usually take into account various indirect costs related to the product. It shouldn’t be considered an ideal metric unless it is calculated in a way where it can consider a product’s direct and indirect costs when determining its selling price.
Profit Margin is more effective than markup when it comes to pricing products by businesses. Margin takes into account how much it can cost in acquiring the product as it takes into account the indirect costs associated with the product. Businesses must be aware of such aspects when trying to sell their products at a price that can result in profit.
Conclusion
To conclude, markup is the final amount added to the selling price of a product, while margin is the outcome amount after deducting the cost of the product from the revenue. Markup, although at times a reliable metric is inaccurate compared with gross margin in pricing the product. Businesses keep a record of the costs incurred in acquiring a product, but should also take into account the indirect costs that are part of the product so that they can sell correctly priced products that will result in profit.
