‘The Difference Between Margin and Markup’

The difference between margin and markup is extremely important for anyone involved in commerce. Often these two concepts are confused and used incorrectly. The basic difference comes from the methods of calculating margin and markup.

Margin

Margin is the percentage of the final selling price that remains as profit after the sale. For example, if we sell a product with a 50% margin, it means that out of a sale of $100, $50 will be our profit after deducting the cost of the product.

Can the margin be greater than 100%?

Often people confuse margin with markup, claiming to sell something with a 300% margin. Logically, the margin physically cannot exceed 100%. Because in the case of a 100% margin, 100% of the sale value would remain for us, meaning the product would cost us nothing. Saying that the margin is over 100% would mean that someone is paying us to buy the product.

Let’s consider a simple example. We are a store selling photocopy paper. We buy it from the manufacturer for $10, which is our cost, and in order to make a profit, we need to sell it for a higher amount. For example, if we want to earn another $10, we need to sell our paper for $20. What is the margin in this case? Since $10 remains as profit out of every $20 (after deducting the cost of purchasing the paper from the manufacturer), our margin is 50% (10/20 = 0.5 = 50%).

How to calculate the final price knowing the purchase price and the desired margin?

If we want to calculate the final price of a product knowing the margin at which we want to sell it and already knowing its purchase price, we can use the following formula:

Selling price with a given margin = Purchase price / (1 – margin percentage).

For a 40% margin, it would look like this:

Selling price = Purchase price / (1 – 40%)

Which, after removing the percentage sign, would look like this:

Selling price = Purchase price / (1 – 0.4).

Markup

Markup is calculated a little differently – it is the percentage of the purchase price of a product that is added to its selling price. In this case, the markup can safely exceed 100% and is often confused with margin. Let’s go back to our paper example. We buy paper from the manufacturer for $10, and if we want to earn another $10, we sell it for $20, which is 100% more than what we bought it for – and that extra 100% is the markup. But the margin will be “only 50%” and never exceed 100%.

Formula for calculating the markup percentage

Let’s consider another example to demonstrate the difference between margin and markup. We sell our paper for a whopping $100 – which means our markup is 900% because we sell it for an additional 900% of the purchase price ($10 + 900% * $10). But what will be the margin? Out of every transaction of $100, we earn $90, so it will be 90/100 = 90%.

How do we calculate the markup percentage based on the purchase price and the selling price? Here is the formula:

Markup = ((Selling price – purchase price) / purchase price) * 100%

When we substitute the data presented in the example above:

Selling price – $100

Purchase price – $10

Markup percentage = ((100 – 10) / 10) * 100% = 900%.


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