Tip 48) So, what’s the difference between margin and markup?

Many small business owners get a little confused between margin and markup, so I thought I would try to explain it as simply as I can! 

The difference is that margin is sales minus the cost of goods sold, while markup is the amount by which the cost of a product is increased to set your selling price.

Here is an example...

Markup
Cost price = £10
Markup of 50% of your cost price = £5
So, your selling price is the two added together: £10 + £5 = £15

Gross Margin (Gross Profit)
Your gross margin is sales minus the cost of goods sold, often shown as a %.
To show the margin of the above example:
Selling price = £15
Cost price = £10
Profit = £5
To find the profit margin %:
Divide the profit (£5) by the selling price (£15) and x 100 = margin of 33%

Net Margin (Net Profit)
Your net margin is sales minus the cost of goods, minus all other overheads. This is also often shown as a % and tends to be used when looking at monthly or annual accounts.
Monthly Sales = £10,000
Cost of sales = £5,000
Overheads = £3,000
Profit = £2,000
To find the net margin %:
Divide the profit (£2,000) by the monthly sales (£10,000) x 100 = 20%

To find other markup percentages, the calculation is:
Desired margin (profit) ÷ Cost of goods x 100 = markup %

For example, if you know that the cost of a product is £50 and you want to earn a margin of £30 on it, the calculation of the markup percentage is:

£30 Margin ÷ £50 Cost x 100 = 60%

If we multiply the £50 cost price by 1.60, we arrive at a price of £80. The difference between the £80 selling price and the £50 cost price is the desired margin of £30.
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Hope that makes sense! If you need any help with your pricing, please give me a shout!

Jo x

P.S. As always, if you need help, either pop along to one of our online Mastermind sessions or contact me for a 1-2-1.​