Profit margin vs Markup – What’s the difference and how do I calculate them?
This may be obvious to some but knowing the difference between how much you markup something and the margin received is crucial. Margin and profit are the same thing. Marking up an item is adding on a percentage, above the cost price, to get to the final selling price. Margin is the %/Rand value of what is realized when and item sold, and is the difference of the selling price minus the cost price. This is represented as a percentage or Rand value.
Markup and margin are mutually exclusive and although have a direct connection are not one in the same. A 50% markup on your cost price does not mean a 50% margin. However, a 50% discount is the same as removing 50% of the margin. So pay close attention when you run discounted offers and promotions.
Markup vs Margin Comparison Table
Below illustrates the difference in margin as the markup increases or decreases. From this you can clearly see that margin doesn’t equal the same amount as markup.
Calculating Margin as a % or Rand value
To find out what the margin (% value) is for an item the following formula should be used.
(Selling price – cost price) / Selling price = X%
(R200 – R123) / R200 = 38.5% (0.385) or R77
Calculating Selling price from a desired margin %
If you’d like to do things the other way round and calculated the selling price and you know what margin you need then work from the following.
If the cost for an item is R500 and you want a 30% margin:
R500 / (100%-30%)
R500 / (70%)
R500 / .70 = R714.29