Mark-up v Margin

What do the terms mean?

"Mark-up" is the percentage added to the cost of your product to give your selling price.

For instance, you may add a 50% mark-up, meaning you'll sell it at one and a half times the price you paid for the product. This is your gross profit.

"Margin" on the other hand shows how much of the sales price is profit.

Using the example below, the business is making a 33% profit margin. That is, one third of their selling price is gross profit.

Why is there a problem?

Most business owners and sales people talk about 'mark-up', while financial people always talk margin.

That leaves scope for confusion between these types of people as they are not comparing like with like!

Imagine the disappointment if you think you are making 50% when, from a different perspective, you're only making 33%?

Formula

Before we start, let's remind ourselves that:

Gross Profit = Sales - Cost of Sales

The two formulas are:

Mark-up = Gross Profit ÷ Cost of Sales

Margin = Gross Profit ÷ Sales

Plus

Breakeven = Overheads ÷ Margin

Example

Using the figures we gave above:

Sales are £150, Cost of Sales is £100 and Gross Profit is £50.

That gives:

£50 ÷ £100 = 50% Mark-up

£50 ÷ £150 = 33% Margin