Markup vs margin: Why both are important
What is markup?
Markup is the amount you add to the cost of a product to get the sale price. The higher the markup, the more profit you make on each sale. Markup shows how much money is being made on an item relative to its original cost and is generally expressed as a percentage. Unlike margin, you control markup – while it has to be managed thoughtfully, it’s one lever that can be pulled to raise profitability.
Example of markup in business
Different types of product have different levels of markup. While it might seem as if lower-priced items always have a lower markup, while more expensive products have a higher markup, that’s not necessarily true. Some products with a low sale price – for example, bottled water and movie theatre popcorn, have a very high markup because the original cost is so low.
Why is markup important for your business?
Markup determines how much money you make from each product sold. Setting standard markups for different product categories helps you calculate appropriate sale prices, even if the cost to your business changes.
For some products — for example, groceries — markup is very low on individual items, which means you need to sell large volumes to make money. In others, like electronics and designer goods, markup is very high — in some cases, 250% to 500% — so retailers need to sell fewer items to turn a profit.
How to calculate markup using the markup formula
To calculate markup, you need to know the price your business paid for the product, and a sale price of your item.
The markup formula looks like this:
Markup = (Sell price - Buy price) ÷ Buy price
Here’s how to calculate markup for a pair of sunglasses.
Cost of sunglasses to the retailer: $7
Sale price: $70
Subtract the cost from the sale price: $70 - $7 = $63
Divide by the cost: 63 ÷ 7 = 9
Multiply by 100 to find the percentage: 9 x 100 = 900% markup.
What is a margin?
A margin — also called a profit margin — is a measure of the profit a business generates after taking out all costs associated with running the business. There are several types of margin, including gross margin, operating margin and net margin. Each factors in different costs.
You can calculate a margin for a single product, or an overall margin as part of your yearly or quarterly profit and loss reports.
Example of margin in business
Sally’s Garden Supplies - Income statement – Quarter ending 31/12/24
Revenue - $700,000
Cost of goods - $200,000
Gross profit - $500,000
Other costs (rent, staffing, insurance etc) - $400,000
Net profit - $100,000
Gross margin - 71.4% (Gross profit ÷ total revenue) X 100
Net margin - 14.3% (Net profit ÷ total revenue) X 100
How to calculate margin using the margin formula
To calculate the profit margin for a single product, you need the same numbers used to calculate markup. However, the calculation itself looks slightly different:
Margin = (Sell price - Buy price) ÷ Sell price
Again, to find the margin percentage, multiply the result by 100.
For example — here’s how you would calculate the margin on a handbag.
Sale price of handbag: $200
Cost paid by retailer (buy price): $50
Subtract the buy price from the sale price: $200 - $50 = $150
Divide by the sale price: 150 ÷ 200 = 0.75
Multiply by 100 to find the percentage: 0.75 X 100 = 75% margin
Differences between gross, operating and net profit margins
The difference between gross, operating and net profit margins is that each metric measures profit differently and includes different cost inputs.
Gross profit margin = revenue - cost of goods sold (COGS)
Operating profit margin = revenue - COGS and operating expenses
Net profit margin = revenue - all expenses including COGS, interest, operating expenses and taxes
To express the result as a percentage, take the final number, divide by revenue, and multiply by 100.
What are the key differences between markup and margin?
The key differences between markup and margin are:
Markup determines how much revenue is made on a specific item, while margin measures overall profitability.
Markup can be controlled and set by your business (to a point), while margin depends on a number of factors and external costs.
Why are both important?
Both markup and margin are important — markup as a driver of revenue, and margin as a measure of profitability. They influence each other. For example, if profit margins slump thanks to increased COGS or operating expenses, markup may need to be increased to boost profitability.
When should I use markup?
You should use markup to help determine the sale price of your items to cover your costs and make a profit. Of course, your pricing strategy is also influenced by other factors, such as demand, competition and branding. Depending on your industry, markup percentages may be similar for all your product options or may vary across product categories.
When should I use margin?
You should use margin – whether gross profit, net profit or operating margin – when you want an accurate measure of profitability. Margin can be a useful way to examine the profits generated by a single product, or to look at revenue and profitability as a whole, including factors like operating expenses, cost of goods sold, taxes, and other costs involved with running a business.
Knowing your gross, net and operating profit margins can also help you identify inefficiencies in your business and find ways to save money. For example, a wide gap between gross and operating margins could indicate that your operating costs are too high.
Markup and margin FAQs
Why is it important to keep a close eye on your margins?
Your margins measure the profitability and performance of your business. If you don’t keep track of them, it’s easy to miss the impact of a rise in the cost of goods or your operating costs.
How do I price the markup to hit target gross margins?
You can use a target profit margin to determine the right markup and pricing for items you sell — here’s how.
For example, say you run a business selling novelty pens. It costs you $5 to have each pen made by the manufacturer to your specifications.
To achieve a 25% profit margin, you can use this formula:
Selling price = Cost price ÷ (1 - Profit margin)
So, with the values:
Selling price = 5 ÷ (1 - 0.25)
Which is: 5 ÷ 0.75 = 6.66
Therefore, you should sell the item for $6.66 to achieve a 25% profit margin.
Managing markup and margin with MYOB
Markup and margin are key terms when you’re working on a pricing strategy – but they’re not easy to understand or use, particularly if you’re a new business owner.
MYOB’s accounting software lets you skip the complex calculations and gain real insight into your profitability with simple dashboards and built-in profit margin and markup calculations. User-friendly, cloud-based and designed for Australian and New Zealand business owners, the software helps you make smart choices around pricing products and streamlining expenses in your business.
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Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.