Margin vs Markup

Difference Between Margin and Markup

The key difference between Margin and Markup is that margin refers to the amount derived by subtracting the cost of the goods sold of the company during an accounting period with its total sales, whereas, the markup refers to the amount or percentage of profits derived by the company over the cost price of the product.

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Margin vs Markup (wallstreetmojo.com)

The first & foremost step in determining the profitability of a firm is defining the pricing structures of its products. It can be realized by understanding the margin and markup as these numbers play an important role in determining the revenues & bottom line in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

As illustrated in the example above, both are different accounting terms that provide two different perspectives of looking at business profit. When expressed as a percentage of sales, it is called profit-margin, but if expressed as a percentage of a cost, it is called Markup. These are like two sides of a coin – different & yet closely related.

Margin vs. Markup Infographics

Let’s see the top differences between margin vs. markup.

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Margin vs Markup (wallstreetmojo.com)

Key Differences

The key differences are as follows –

#1 – How are they different?

Much like the analogy of cup being half full or half empty, margin and markup are two different outlooks on the relationship between price vs. costPrice Vs. CostCost is the expenditure incurred by the business on material, labour, sales, and utilities. In contrast, price is the amount charged by the company from its customers for providing goods and services, and the customer has to pay to buy the goods or services.read more. A margin is more with respect to sales, while the latter is more with respect to a value derived on the manufacturing cost. Both have their significance in financial statement analysis.

#2 – Perspective

In absolute terms, both refer to the same numeric value. However, the perspective makes them all together with a different concept. Refer to the diagram below for our earlier example:

Margin vs Markup key difference

When looked from the seller’s view, the $ 100 value is a margin, but when looked from the viewpoint of a buyer, the same $100 is markup. However, in percentage terms, the two figures are quite different.

#3 – Relationship

These concepts can be confusing while deriving pricing and, if not investigated properly, can affect your profitability. Since the reference for calculating markup is cost price, it will always be greater than the margin, the basis of which is always a higher value – selling price. As a thumb rule, the markup percentage must always be higher than the margin percentage else you are making losses in the business.

The markup calculation is more likely to impact pricing changes over time than a margin-based price. It is since the cost upon which the markup number is based may differ with time, or its calculation may vary, resulting in different costs, which would, therefore, lead to different prices.

The following bullet points illustrate the differences and the relationships between the margin and markup percentages at distinct intervals:

Margin Markup 
10%11.10%
20%25.00%
30%42.90%
40%80.00%
50%100.00%

To derive a general markup percentage, the expression would be as follows:

Desired margin ÷ Cost of goods

For example, if the manufacturing cost of a product is $100 and you want to earn a margin of $20 on it, the calculation of the markup percentage is:

$20 Margin ÷ $100 Cost Price = 20 %

If we multiply this $100 cost price by 1.20, we arrive at a price of $ 120. The difference between the selling price $120, and the $100 cost price is the desired-margin of $20.

#4 – Which is preferable?

They try to present a different perspective on the same financial status. However, at any point in time, markup is always greater than gross-margin, and hence it overstates the profitability of the firm. Due to this reason, markup is most often preferred as a reporting mechanism by the sales and operations department. For any person with a non-financial background, it will look like a transaction is obtaining a larger profit if they are presented with Markup numbers than corresponding Margin numbers.

Margin vs. Markup Comparative Table

BASISMARGINMARKUP
SignificanceIt is technically a profit-margin that measures the profitability of a firm. It is the proportion of the income that has been leftover in the business after the cost of production has been paid out from revenues.Markup refers to the value-added by a seller to the cost price that covers its production costs and profits, in order to arrive at the price that a finished product can be sold at.
What is it?Numerically, it is a percentage of the selling price.Numerically, it is a cost multiplier.
Defined as a Function ofSalesCost
Expressed from the Perspective of SellerBuyer
Mathematical Formula(Selling price – Cost price) / Selling Price(Selling price – Cost price) / Cost price
RelationshipMargin = 1 – (1 / markup)Markup = 1 / (1 – gross margin)

Conclusion

Getting to understand the relationship between margin and markup is vital for a business. Do the math wrong, and you may end up losing money without even realizing it. On the other hand, if done right, it can help in planning and implementing your long term and short term strategic initiatives like planning for more penetration in the marketPenetration In The MarketMarket penetration is calculated as how much the product or service is being used compared to its total market and how it creates a position in the market, especially in the primary stages of setting up the business.read more or cross-selling to your existing customers.

Recommended Articles

This article has been a guide to Margin vs. Markup. Here we discuss the top differences between margin and markup along with infographics and comparison table. You may also have a look at the following articles –

Reader Interactions

Comments

  1. Imad Fawzi says

    Amazingly good article I learnt a lot of it while I am not an accountant – I am sales guy.

    Many thanks again , keep the great works.

    • Dheeraj Vaidya says

      Thanks for your kind words!

Leave a Reply

Your email address will not be published. Required fields are marked *