What Is The Difference Between Margin And Markup In Finance?
When talking about finance and accounting, there are a variety of terms to keep in mind. One of those is the difference between margin and markup.
Accounting Tools explains the difference well. To give an overview, margin is sales minus the cost of goods sold while markup is the amount added to the total cost incurred to produce the goods. Both of them factor in revenue and costs, and both help ensure that the right prices are set.
Expounding more on this, here are a few examples and formulas to keep in mind:
An easier way to view markup in finance and accounting is this: It is the extra percentage you charge your customers after you have factored in all the cost of goods. Here’s a simple formula to remember::
(Price – Cost) ÷ Cost = Markup
Let’s say your business is creating and selling wedding cakes. One wedding cake costs you $100 to make, including the ingredients and labor costs. You then sell it for $200. Using the formula above, you’ll end up with the figure “1”, which means you’ve added 100% markup to the total price.
Keeping your markup in mind is important because it ensures that you are not losing money or just breaking even with each sale.
For some, profit margin may seem exactly like markup. However, the difference is that they show two aspects of the same transaction. Markup shows the profit when related to the costs, while profit margin shows profit gained from the sales price generated.
(Price – Cost) ÷ Price = Margin
Going back to the wedding cake business example, let’s say a cake with less tiers is priced at $150 but it cost you $100 to make that specific cake. When you use the formula above, you’ll arrive at the figure “0.3”—which means there is a 30% margin.
When to use which?
Since it has been established that both are quite similar, using either margin versus markup will depend on what you’d like to know. If you are currently determining the retail price of your product, keep the markup in mind.
Once your business is up and running and you review how you’ve done in the past year, calculating for the margin is the smarter option.
Always keep in mind both margin and markup whenever anything related to finance, accounting or setting prices come up. If you begin selling without taking these both into consideration, you might end up with missed revenue or the danger of randomly pricing your offers.
Need more clarity about your business’s processes? Book a Coffee & a Consult with us here!