Margin vs Markup: The Definitive Guide for Business Owners

Margin vs Markup

Margin vs markup: Is there a difference? Absolutely.

Margin and markup are two important accounting terms that are used interchangeably by business owners, contractors, employees, consultants, etc., in their accounting but a slight misunderstanding or confusion can have a drastic impact on your bottom line.

Being a small business owner, it’s important to know the difference between margins and markups. Let’s start with the fundamentals:

  • Margin is also called Profit Margin or Gross Margin or Gross Profit.
  • Revenue: Income earned from providing services and selling products.
  • Cost of goods sold: An accumulated total of all costs used to create a product or service, which has been sold. Includes material, labor costs, freight and shipping charges, etc.

Margin

Definition of Margin

Margin or Gross Margin or Gross Profit is defined as revenues minus the cost of goods sold (COGS).

For best practices, you can use the term Gross Profit when you are referring to the monetary amount and Gross Margin when referring to a percentage or ratio.


How to Calculate Margin

If your company sells cameras for $3000 each and costs $1000 to manufacture, the gross profit would be $2000.

Revenue ($3000) – COGS ($1000) = Gross Profit ($2000)

The Gross  Margin Ratio would be 0.66%, calculated as Gross Profit divided by the revenue.

Gross Profit ($2000) / Revenue ($3000) = Gross Margin Ratio (0.66)

Multiple the Gross Margin Ratio by 100 to make it percentage:

0.66 X 100 = 66% Margin


Gross Margin Formula:

Gross Margin Formula


 

Margin Calculator

Use this simple calculator for calculating GP or Gross Margin:

Margin Calculator


Markup

Definition of Markup

Markup is defined as the ratio between the cost of a good or service and its selling price. The markup amount may be expressed as a percentage.


How to Calculate Markup

By using the same example from above, the Gross Profit was $2000.

Revenue ($3000) – COGS ($1000) = Gross Profit ($2000)

The Markup can be calculated by dividing the Gross Profit by Cost of Goods Sold.

Gross Profit ($2000) / COGS ($1000) = Gross Markup Ratio (2)

Multiple the Markup Ratio by 100 to make it percentage:

2 X 100 = 200% Markup


Markup Formula

How to Calculate Markup


Markup Calculator

Use this simple calculator for calculating Markup:

Markup Calculator


Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

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