Understanding your numbers is essential to setting the right prices and ensuring profitability. Two key concepts in pricing strategies are markup and margin. While they’re often confused and used interchangeably, they represent different aspects of your pricing, and knowing the difference is important for financial clarity.
What is markup?
Markup refers to the amount added to the cost of a product to determine its selling price. It’s calculated as a percentage of the cost price, which means it reflects how much you’re adding on top of your costs to cover overhead and generate profit.
For example:
- Suppose a product costs you $50 and you want to mark it up by 50%
- You multiply the cost price by 50% (x 1.5)
- $50 x 1.5 = $75
So in this example, a 50% markup on a $50 product results in a $75 selling price. When setting prices based on markup, you’re directly accounting for the percentage increase over the cost to help cover expenses and provide profitability.
What is margin?
Margin, on the other hand, reflects the percentage of the selling price that’s left as profit after covering the cost of goods sold.
Using the same example:
- If you sell a product for $75, and the cost is $50
- The profit is still $25, but the margin here is 33.3% ($25 divided by $75)
To put it simply, markup is based on cost, while margin is based on revenue. This distinction is important because both calculations are used and relevant in business, but they serve different purposes.
Why does the difference matter?
Margin is what is reported on financial reports, and reflects the profit made. We come across a number of businesses who may say their margin is 50% when in fact that is their markup, and their margin is 33.3%. This can lead to incorrect discussions around costing, pricing, breakeven point and forecasting just to name a few.
How can mastering markup and margin drive growth?
When business owners grasp the distinction between markup and margin, they gain the power to make smarter, more strategic pricing decisions. Properly applied, these concepts can help optimise profitability, and sustainable cash flow. By adjusting your markup and margin strategies according to your business goals, you can strike the right balance between covering costs, attracting customers, and achieving growth.
Need help calculating your markup or margin?
If you’re unsure about your markup or margin, we can help. Here's how:
- We have a table of markup to margin conversions you can use as a guide, simply send us an email if you’d like a copy of this.
- If you’d like help reviewing your pricing strategies, please get in touch.
Whether you’re looking to enhance your profitability or improve cash flow, we’re here to help and can provide the right guidance for your business.