Markup and Margin – What’s the difference?

markup and margin difference

Markup and Margin Difference - What is it?

The markup and margin difference. When you're running a small business, it's important to understand the difference between markup and margin.

This understanding will help you price your products and services correctly, and ultimately ensure that your business is profitable.

So, what exactly is the difference between markup and margin?

Keep reading to find out.


Markup and Margin Difference: The Basics

Put simply, margin is the amount of money you make on a product or service after accounting for all the associated costs.

To calculate margin, you take your selling price and subtract your costs of goods sold (COGS).

COGS includes the cost of materials, labour, shipping, etc.

Here's an example: let's say you're selling a widget for £10.

Your COGS is £5.

This means that your margin is £5 (or 50%).

On the other hand, markup is the amount you add to your COGS to determine your selling price.

Using the same example as above, if your COGS is £5 and you want to achieve a 50% markup, you would simply add 50% to your COGS (£2.50), resulting in a selling price of £7.50.

It's important to note that margin and markup are two different ways of looking at the same thing—the amount of money you make on a sale.

With margin, you start with your selling price and then subtract your costs. With markup, you start with your costs and then add a percentage (or dollar amount) to determine your selling price. 

Markup and Margin Difference: The Importance of Knowing the Difference

Why does any of this matter?

Because knowing the difference between markup and margin gives you more control over your pricing.

Let's say you have a product that costs £10 to produce, but you want to earn a 60% profit margin.

To do this using markup, you would need to charge £25 for the product (60% of £10 = £6; £10 + £6 = £16; 16/10 = 1.6; 1.6 x 10 = £16).

However, if you use margin instead, you can simply charge £15 for the product (£15 - 60% = £6 profit).

In this case, using margin results in a lower selling price—and more competitive pricing could mean more sales for your business!

At the end of the day, whether you use markup or margin to price your products is up to you.

Some businesses prefer one method over the other, while some use a combination of both depending on the situation. The most important thing is that you understand how each method works so that you can make informed decisions about pricing—and ensure that your business remains profitable!

When it comes to running a small business, it's important to understand markup and margin —and how they can impact your bottom line.

By understanding the basics of each method and taking into account things like competitiveness and profitability, you can make informed decisions about pricing that will help ensure the success of your business!

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.