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Margin Vs Markup: Head To Head Differences

Margin refers to revenue minus costs and is expressed as a percentage of sales, while markup refers to the amount added to cost to derive the selling price and is expressed as a percentage of cost. Both refer to the same value but from different perspectives: margin from the seller's view and markup from the buyer's view. Markup must always be higher than margin, otherwise the business will lose money. Understanding the relationship between margin and markup is important for profitability calculations and pricing strategies.

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214 views3 pages

Margin Vs Markup: Head To Head Differences

Margin refers to revenue minus costs and is expressed as a percentage of sales, while markup refers to the amount added to cost to derive the selling price and is expressed as a percentage of cost. Both refer to the same value but from different perspectives: margin from the seller's view and markup from the buyer's view. Markup must always be higher than margin, otherwise the business will lose money. Understanding the relationship between margin and markup is important for profitability calculations and pricing strategies.

Uploaded by

1abhishek1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Margin vs Markup

Introduction

The first and foremost step in determining the profitability of a firm is defining the pricing structures of
its products. This can be realized by understanding the margin and mark up as these numbers play an
important role in determining the revenues and bottom line in the financial statements.

What are these terms and why are they sometimes confused. Margin (more popularly known as gross
margin) in simple terms is revenue minus the cost of goods sold.  For example, if a product sells for $500
and costs $400 to produce, its margin would be calculated as $100.  If expressed in percentage terms,
the margin percentage will be 20% (calculated as the gross margin divided by total sales i.e. 100/500).
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 mark-up of $100 from the cost price of
$400 yields the $500 price. Or, stated as a percentage, the mark-up percentage is 25% (calculated as the
mark-up amount divided by the product cost i.e. 100/400).

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

Head to head differences

BASIS FOR COMPARISON MARGIN MARKUP


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

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 and cost. Margin is more with respect to sales and markup is more
with respect to value derived on the manufacturing cost. Both have their own significance in financial
statement analysis

 Markup ensures that you are making profits and quantifying that profit each time you sell a product.
 Markup is essential during the initial phases of business as it help you understand the cash inflows
and outflows. This can help in identifying the efficient points and the bottlenecks in the business.
 Margin is a reliable and precise way of calculating the profits and clearly highlights the impact your
sales have on the bottom line.

Perspective

In absolute terms, margin and markup refer to the same numeric value. However, the perspective
makes them altogether a different concept. Refer to the diagram below for our earlier example:

Selling Price = $ 500

$100

Cost Price = $ 400

When looked from the view of a seller, the $ 100 value is 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.

Relationship

The concept of margin and mark up 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.
This is due to the fact that 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 illustrates the differences and the relationships between the margin and
markup percentages at distinct intervals:

 To attain a 10% margin, the markup percentage should be 11.1%


 To attain a 20% margin, the markup percentage should be 25.0%
 To attain a 30% margin, the markup percentage should be 42.9%
 To attain a 40% margin, the markup percentage should be 80.0%
 To attain a 50% margin, the markup percentage should be 100.0%

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.

Which is preferable:

Margin and Markup try to present different perspective on the same financial status. However, at any
point of 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 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.

Conclusion:

Getting to understand the relationship of markup and margin 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 market or cross selling to your existing customers.

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