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 by the company during an accounting period from its total sales. In contrast, markup refers to the amount or percentage of profits derived by the company over the product’s cost price.
The first & foremost step in determining a firm’s profitability is defining its products’ pricing structures. It can be realized by understanding the margin and markup, as these numbers play an important role in determining the revenues & bottom line in theFinancial 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. 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..
- In simple terms, margin (more popularly known as gross margin) is revenue minus the COGSCOGSThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. . If expressed in percentage terms, the margin percentage will be 20% (calculated as the gross margin divided by total sales, i.e., 100/500). For example, if a product sells for $500 & costs $400 to produce, its margin would be calculated as $100.
- Markup is the amount that should be added to the manufacturing cost of a product to derive the price that it should be sold at. Continuing with our above example, a markup of $100 from the cost price of $400 yields the $500 price. Or, stated as a percentage, the markup percentage is 25% (calculated as the markup amount divided by the product cost, i.e., 100/400).
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 is expressed as a percentage of a cost and called Markup. These are like two sides of a coin – different & yet closely related.
Table of contents
Margin vs. Markup Infographics
Let’s see the top differences between margin vs. markup.
The key differences are as follows –
#1 – How are they different?
Much like the analogy of a 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.. A margin is more concerning sales, while the latter is more concerning a value derived from the manufacturing cost. Both have their significance in financial statement analysis.
- MarkupMarkupThe percentage of profits derived over the cost price of the product sold is known as markup. It is determined by dividing the company's total profit by the cost price of the product and multiplying the result by 100. ensures that you are making profits & quantifying that profit each time you sell a product.
- Markup is essential during the initial phases of business as it helps you understand the cash inflows and outflows. It can help in identifying the efficient points & the bottlenecks in the business.
- A margin is a reliable & precise way of calculating the profits & clearly highlights the impact your sales have on the bottom lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. .
#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:
From the seller’s view, the $ 100 value is a margin, but when viewed from a buyer’s viewpoint, 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, 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, leading to different prices.
The following bullet points illustrate the differences and the relationships between the margin and markup percentages at distinct intervals:
To derive a general markup percentage, the expression would be as follows:
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 percentageCalculation Of The Markup PercentageMarkup percentage is a percentage markup over the cost price to get the selling price and is calculated as a ratio of gross profit to the cost of the unit. During decision-making for selling price, companies use markup on selling price for increasing profit margin. is:
$20 Margin ÷ $100 Cost Price = 20 %
If we multiply this $100 cost price by 1.20, we arrive for $ 120. The difference between the selling price of $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 firm’s profitability. Due to this reason, markup is most often preferred as a reporting mechanism by the sales and operations department. Any person with a non-financial background 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
|Significance||It 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 of||Sales||Cost|
|Expressed from the Perspective of||Seller||Buyer|
|Mathematical Formula||(Selling price – Cost price) / Selling Price||(Selling price – Cost price) / Cost price|
|Relationship||Margin = 1 – (1 / markup)||Markup = 1 / (1 – gross margin)|
Understanding the relationship between margin and markup is vital for a business. Do the math wrong, and you may lose 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 customers are using the product or service compared to the total market for that product or service. cross-selling to your existing customers.
This article has been a guide to Margin vs. Markup. Here we discuss the top differences between margin and markup, infographics, and a comparison table. You may also have a look at the following articles –