Understanding the difference between margin and markup is crucial when pricing products or services. Both terms describe profitability, but they do so from different reference points.
Markup refers to the difference between your product's cost and its selling price, expressed as a percentage of the cost. To find markup, subtract the cost from the selling price, divide the result by cost, and then multiply by 100. For instance, if a product costs $50 and sells for $75, your markup is ($75 - $50)/$50 × 100 = 50%.
Margin, however, describes profit as a percentage of the selling price itself. Calculate margin by subtracting cost from selling price, dividing this number by selling price, then multiplying by 100. With the earlier example: ($75 - $50)/$75 × 100 = 33.3%.
The key distinction is the perspective each one uses: markup focuses on cost, while margin emphasizes selling price. Confusing these two terms can lead to pricing errors and challenges in profitability calculations.
Keeping margin and markup clear in your strategy ensures you're accurately managing profitability. Always clarify which method you're using, and recognize that markup percentages consistently result in higher values compared to margin percentages.
