Profit Margin Vs Markup Difference | Easy Explanation

October 27th, 2020 by Naveen Singh in Business

Are you confused between margin vs markup? If you are having trouble differentiating between profit margin and markup, then this post can be helpful for you. Margin and markup are two different terms. Both of the two use the same input and analyze the same transaction; however, it depicts different information. As a business owner, you need to understand the difference between the two different terms.

In this post, we will discuss the significant differences between profit margin and markup in an intelligible manner.

Table of Contents

Important Terms To Differentiate Margin Vs Markup

Now that you are all set to understand the difference between margin vs markup, let’s discuss some important terms that can make the comparison easier for you:

Revenue:

Revenue is the money you get by selling your product or services. It is the top line of your income statement that depicts the total earnings before any deductions.

Cost Of Goods Sold:

The cost of goods sold is the value that indicates the expenses utilized in marking your products or services. When you calculate COGS, you need to include the cost of the material used and the labor involved.

Gross Profit:

Gross profit is the revenue that remains in hand after paying the expenses of making the products and rendering the services. To calculate the gross profit, you need to subtract COGS from the revenue.

After knowing these crucial terms, you can differentiate between margin vs markup for your business.

How To Calculate Margin Vs Markup?

When you calculate margin and markup for your business, you can easily cover your expenses and ensure a profit in your business. Let’s see the difference between the two terms along with their formulae:

Calculation Of The Margin

Margin or gross margin is the money you make after settling COGS. You can calculate the margin; you need to perform the below-given calculation:

In the first place, you need to calculate gross profit:
Gross Profit = Revenue – COGS.
Next, you need to calculate the percentage of the revenue that is your gross profit.
To calculate the margin, divide gross profit by revenue-
Margin = Gross Profit/Revenue.
To calculate the percentage margin, multiply the margin result with 100.
If the margin percentage is 25%, it means that you keep 25% of the total revenue and invested 75% of the total revenue in the purchase of the product.

Note: The margin formula depicts how much of every dollar you have saved after paying the expenses. If you have the larger margins, it means you keep a larger percentage of your total revenue.

Calculation Of The Markup

To understand the margin vs markup difference, let’s understand how you can calculate your business’s markups. A markup indicates how much more your selling price is than the total cost of the amount. To calculate the markup:

First of all, find the gross profit with the same formula as above:
Gross Profit = Revenue – COGS.
Next, you need to find the percentage of COGS that is your markup. To do so, you need to divide your gross profit with the COGS:
Markup = Gross profit /COGS.
To find the markup percentages, you need to multiply the markup result with 100.
If the markup is 33%, it means that you sold your product for 33% more than the COGS.

Note: The markup formula indicates how much more you sell your item for as compared to the amount you have spent. A higher markup value means you keep more of your revenue when selling your product.

Markup Vs Margin: Conversions

To convert margin vs markup value, you need to perform the below-given procedure:

Margin to Markup Conversion

In the first place, we will see how to convert margin into markup. The below-given formula explains the same:

Markup = [Margin / (1 – Margin)] X 100

For instance, if you want to keep a margin of 25% and calculate what your markup should be, then the above-given formula can help.

Markup = [0.25 / (1 – 0.25)] X 100

Percentage Markup = 33%

Markup To Margin Conversion

Now let’s discuss, how you to calculate your margin when you know your exact markup:

Margin = [Markup / (1+ Markup)] X 100

Let’s say, you want a markup of 50 percent and wondering what should be your margin. Below is how you will calculate the margin:

Margin = [0.50 / (1 + 0.50) X 100

Margin = 33%.

Benefits Of Analyzing Margins & Markups

When you make a relative comparison for your margin vs markup, it can help your business to set your goals and achieve them. If you want to decide how much profit you want to make in your business, start setting up margins and markups.