What is Markup?

Markup refers to the difference between the selling price of a good or service and its
cost. It is expressed as a percentage above the cost. In other words, it is the added price
over the total cost of the good or service that provides the seller with a profit.

Markup = Selling Price-Cost

What is Margin?

Margin is often expressed as a specific amount in currency, or a percentage (similar to

markup). However, margin uses price as the divisor.

Margin = Sales - COGS

When should we use margin? When should we use markup?

The question then arises: if these two M words are so similar, how do we know which
one to express or use at a given time?

Markup is perfect for helping ensure that revenue is being generated on each sale.
Markup is good for getting started because, as you are getting things set up, you are
keenly aware of the costs for your business, and you’re still learning about the kind of
revenue you can bring in through sales.

As you get to know your business better and you start to look at reports on your sales,
margin can be helpful for examining how much actual profit you’re making on each sale.
The difference between margin and markup 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 in
order to derive the selling price. A mistake in the use of these terms can lead to price
setting that is substantially too high or low, resulting in lost sales or lost profits,
respectively. There can also be an inadvertent impact on market share, since excessively
high or low prices may be well outside of the prices charged by competitors.

>Margin (also known as gross margin) is sales minus the cost of goods sold. For example,
if a product sells for P100 and costs P70 to manufacture, its margin is P30. Or, stated as a
percentage, the margin percentage is 30% (calculated as the margin divided by sales).

>Markup is the amount by which the cost of a product is increased in order to derive the
selling price. To use the preceding example, a markup of P30 from the P70 cost yields the
P100 price. Or, stated as a percentage, the markup percentage is 42.9% (calculated as the
markup amount divided by the product cost).

It is easy to see where a person could get into trouble deriving prices if there is confusion
about the meaning of margins and markups. Essentially, if you want to derive a certain
margin, you have to markup a product cost by a percentage greater than the amount of
the margin, since the basis for the markup calculation is cost, rather than revenue; since
the cost figure should be lower than the revenue figure, the markup percentage must be
higher than the margin percentage.
The markup calculation is more likely to result in pricing changes over time than a margin-
based price, because the cost upon which the markup figure is based may vary over time;
or its calculation may vary, resulting in different costs which therefore lead to different
prices.

The following bullet points note the differences between the margin and markup
percentages at discrete intervals:
To arrive at a 10% margin, the markup percentage is 11.1%
To arrive at a 20% margin, the markup percentage is 25.0%
To arrive at a 30% margin, the markup percentage is 42.9%
To arrive at a 40% margin, the markup percentage is 80.0%
To arrive at a 50% margin, the markup percentage is 100.0%

To derive other markup percentages, the calculation is:

Desired margin ÷ Cost of goods

For example, if you know that the cost of a product is P7 and you want to earn a margin of
P5 on it, the calculation of the markup percentage is:
P5 Margin ÷ P7 Cost = 71.4%

If we multiply the P7 cost by 1.714, we arrive at a price of P12. The difference between
the P12 price and the P7 cost is the desired margin of P5.
What is a 'Markdown‘

A markdown is the difference between the highest current bid price among dealers in
the market for a security and the lower price that a dealer charges a customer. Dealers
will sometimes offer lower prices in order to stimulate trading; the idea is to make the
money back in extra commissions.