This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Generating profit may involve pricing your product appropriately and understanding direct and indirect costs. Knowing how gross profit margin and product markup work may help your business set its pricing strategy and work toward profitability.
Although the calculations may sound similar, each serves a different purpose. Learn what both are and how to calculate markup and margin.
What Is Margin?
Margin is a key financial metric that looks at profit after accounting for costs. Expressed as a percentage, the margin looks at how your business’s sales compare with its earnings. Think of margin as the amount of money your business earned after accounting for the amount you spent.
A higher margin may means that your business is able to keep more of its profit from sales. A lower margin may mean that costs are taking up a greater portion of your business revenue.
One type of margin is the gross profit margin. This metric compares the price of a product with the cost of goods sold (COGS), which could include raw materials, labor, and direct overhead costs. Gross profit margin may not include other costs you may pay for your business, including administrative expenses and marketing costs.
How to Calculate Gross Profit Margin
To calculate the gross profit margin, start with your gross profit, or the difference between your business revenue or sales price, and cost of goods sold. Then divide this number by your revenue to get your profit margin percentage.
More specifically, here is the formula for how to calculate margin:
[(Revenue – COGS) / Revenue] X 100 = Gross Profit Margin
For example, KMR Industries sells notebooks at $5 and each one costs $3.50 to make.
To find the gross profit, you’ll subtract the COGS ($3.50) from the sales price ($5) to get $1.50.
Then you may calculate the margin using the above formula:
[($5 - $3.50) / $5] x 100 = 30%
You may choose to calculate the profit margin separately for each product your business sells.
What Is Markup?
Markup is another method to look at a product’s profitability. It’s the amount added to the cost of a product to arrive at the selling price or money you might expect to receive from an item after accounting for costs.
Although also expressed as a percentage, it differs from margin in that it’s not calculated based on revenue. Instead, it’s based on your costs and the percentage you're charging on top.
Some businesses tend to look at markup when setting their prices as it may be a more straightforward method to determine profitability.
How to Calculate Markup
To understand how to calculate markup, divide your product’s gross profit by its cost of goods sold, then multiply by 100.
The markup formula is as follows:
Markup = (Gross Profit / COGS) X 100
Or you can decide the markup percentage and apply it to your cost of goods sold:
COGS x (1 + Markup % / 100) = Selling Price
Using the same KMR Industries’ product example above, their markup is 42.9%:
($5 - $3.50) / $3.50 x 100 = 42.9%
In other words, the selling price of the notebook is approximately 42.9% higher than the cost of making the product.
Markup vs. Margin: Understanding the Difference
Both markup and margin look at the profitability of a product, and both formulas use the same variables. The main difference is how each calculation measures it.
Margin measures profitability through the lens of sales price. It looks at it from a top-down view, first looking at your sales price and determining the profit after taking costs into account.
Markup is the opposite, looking at the percentage of your costs. This approach starts with your costs, then adds the desired amount of profit to determine the sales price or revenue.
Whereas markup may be a more simplified way to help set prices, margin may also be useful in that it may help with financial analysis. It could help you see how efficiently you turn sales to profit, with the ability to compare profitability between products, or even the same product over time.
When looking at the percentage you get from calculating markup vs. margin, you’ll end up with two different percentages. The markup could be higher than the margin, even if your sales price and cost of goods are the same. Having a clear understanding of each may help you determine the potential pricing for your products.
Markup-to-Margin Comparison Chart
Markup |
Margin |
Percentage of profit based on cost |
Percentage of profit based on revenue or selling price |
Calculated based on cost of goods sold |
Calculated based on what you charge |
Primarily used to set prices |
Primarily used to help measure profitability over time and across products |
Determined by how much more you charge |
Determined by how much revenue you keep |
When to Consider Using Markup or Margin
Using margin may be helpful when you are looking to analyze profitability, as you may compare it against your business costs. A positive margin might show your sales are covering your direct costs, and a negative one might give you an indication that you may want to consider whether to reevaluate your sales price. Margin also may help with reporting since it’s based on revenue and may be reviewed by investors and lenders.
Markup may prove helpful when you’re setting prices since the amount is based on cost. It also may be a useful way to reevaluate prices if your costs fluctuate. Using both together may help with your financial analysis and pricing strategy.
The Takeaway
Markup and margin are two different ways to analyze profitability and to help set prices. While their formulas are similar, they may have distinct differences in practice. Business managers may want to monitor both when evaluating products and thinking through ways to try to support profitability.
To learn more about financial decision-making, read more on financial modelling and analysis.
Markup and Margin FAQs
What is the difference between markup and margin?
Markup is calculated by using a percentage of costs. Margin is the percentage of your sales price that goes towards profit.
Should I use markup or margin?
You may use markup to help set prices and margin to help determine if your price is covering your direct costs.
Is a 50% markup the same as a 50% margin?
No, they’re not the same. A markup divides your profit by the product’s cost. Margin divides your profit by the selling price.
How do you convert markup to margin?
To convert markup to profit margin, divide the markup (expressed as a decimal) by one plus the markup.
Photo: Getty Images
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
