Understanding Markup vs. Margin
Markup and Margin are two terms that are often used interchangeably, but they refer to completely different financial metrics. Understanding the difference is crucial for pricing your products correctly.
Markup
Markup is the amount by which the cost of a product is increased in order to derive the selling price. It is expressed as a percentage of the Cost.
Markup % = (Selling Price - Cost) / Cost × 100
Gross Margin
Gross Margin is the percentage of the Selling Price that is gross profit. It tells you what percentage of revenue is actual profit after covering the cost of goods sold (COGS).
Margin % = (Selling Price - Cost) / Selling Price × 100
Example
If you buy a widget for $50 and sell it for $75:
- Markup: ($25 profit / $50 cost) = 50%
- Margin: ($25 profit / $75 selling price) = 33.3%