Margin and markup: what is the difference

"I put 30 percent markup on every item, so my margin is 30 percent too" is something many shopkeepers say, and it is wrong. Markup and margin are two different things, and they do not give the same number. Mixing them up causes mistakes both in setting prices and in working out profit: you earn less than you think. Let us look at the difference in plain numbers.

Two formulas, two bases

Markup is calculated on cost: by what percentage the selling price is above cost. The formula is (selling price − cost) ÷ cost × 100.

Margin is calculated on the selling price: what share of the selling price is your profit. The formula is (selling price − cost) ÷ selling price × 100.

The top of the fraction, the profit amount, is the same; the bottom differs. That is why margin is always smaller than markup (as long as the item is not sold at a loss).

One item as an example

The item cost you 8,000 so'm and you sell it for 10,000. Your profit is 2,000 so'm.

• Markup: 2,000 ÷ 8,000 × 100 = 25%.
• Margin: 2,000 ÷ 10,000 × 100 = 20%.

Same item, same price, same profit, yet two different numbers. The point is not that one of them is calculated wrongly, but what each of them is for.

Converting one into the other

This list shows how large the gap is:

• markup 10% gives margin of about 9.1%;
• markup 25% gives margin of 20%;
• markup 50% gives margin of about 33.3%;
• markup 100% (price doubled) gives margin of 50%.

The higher the markup, the further the two drift apart. The formulas are simple: margin = markup ÷ (100 + markup) × 100; markup = margin ÷ (100 − margin) × 100.

The most common mistake: adding 30% markup to get 30% margin

Say you want a 30% margin and you add 30% markup to an item that costs 7,000 so'm: the price comes to 9,100. The profit is 2,100 so'm. The margin is 2,100 ÷ 9,100 × 100 = 23.1%. So you are getting almost 7 points less than you planned.

The correct calculation: divide cost by (100 − margin) and multiply by 100. 7,000 ÷ 70 × 100 = 10,000 so'm. Now the profit is 3,000 so'm and the margin is 3,000 ÷ 10,000 = 30%. At that price, the markup is 42.9%.

When to use which

Markup is handy for pricing quickly: "I add 25% on top of cost." It is widely used in trade rules and in agreements with suppliers.

Margin is handy for judging and comparing profit: it shows what share of your takings stays with you. When you compare shops, products and months, use margin, because it is tied to takings.

Remember also that both figures show gross profit, that is, before rent, wages, tax and other costs. Net profit is what remains after those. If tax is included in the price, work from the price without tax.

Add three calculated columns to your product table: profit (so'm), markup (%) and margin (%). The formulas are written once and copied down every row. Then you can sort out the items with the lowest margin and review their price or supplier.

Conclusion

Knowing the difference between markup and margin helps you set prices correctly, judge profit properly and avoid fooling yourself. To calculate these numbers, cost and selling price must be exact in your table. AniqHisob helps prepare that foundation through stock counts and tidying up your records.