When it comes to price setting it’s important to know the difference between markup and margin. Getting these concepts confused can lead you to setting prices that negatively affect your sales (from setting prices too high) or your profits (from setting them too low). It can also have a knock on effect on the market share as the prices could be so much greater or higher than that of your competitors.
Markup and margin both refer to different aspects of the same transaction and both take into account the revenue or selling price (how much you charge your customers) and the cost of goods (how much you spent to acquire or produce the goods), but they are different and it’s important to know how.
What is the difference?
The margin is the difference between the selling price and the cost of the products or services. Margin is used to show the profit made in relation to the selling price or revenue. For example: If the cost of the goods was $20 and it was sold at $25 then the margin would be $5 or in percentage terms 20%. The calculation needed to determine the margin percentage is: Margin ÷ Selling Price x 100 $5 margin ÷ $25 selling price x 100 = 20% Margin can be used to indicate your profitability as it shows you what is left after cost of goods has been taken into account.
Markup The markup is the amount that the cost of goods is increased to achieve the selling price. Markup shows the amount of profit made in relation to the costs of goods. For example: If the cost of the goods was $20 and you wanted a margin of $5 then the markup percentage would need to be 25%, so the selling price would be $25.
To calculate the markup percentage:
Desired margin ÷ Cost of Goods x 100 $5 margin ÷ $20 cost of goods = 25%
To calculate the selling price based on the markup:
Cost of goods x markup percentage $20 x 1.25% = $25 And this gives you the $5 margin that you wanted. Markup can be used to determine the selling price or revenue of your products or services.
This table outlines the different margin and markup prices at 10% margin intervals: