Markup and margin

Markup and margin both describe the same dollar profit on a product. The difference is what you divide that profit by. Markup compares the profit with the cost. Margin compares the profit with the selling price.

Mixing the two up is one of the most common mistakes new planners make. It is worth getting this solid in your first week, because almost every plan you touch will have a margin in it.

First, take out any sales tax

All prices in this module are before tax. In many countries a sales tax is added to the ticket price. It goes by different names, such as VAT, GST or sales tax. It belongs to the government, not to us, so we take it out before we do any margin maths.

To remove it, divide the ticket price by 1 plus the tax rate. With a 20% tax, divide by 1.2: a $60 ticket is $50 before tax. With a 10% tax, divide by 1.1: a $55 ticket is $50 before tax. Where prices are shown without tax, as in parts of the United States, there is nothing to take out.

Amounts in this course are shown in dollars, but the maths works the same in any currency.

The two formulas

Start with the gross profit on one unit. That is the selling price minus the cost. Cost here means the landed cost: what it cost us to get the product into our warehouse, including the supplier price, freight and duty.

Markup tells you how much was added on top of the cost. Buyers and suppliers often talk in markup, because they start from the cost price and build up.

Margin tells you how much of each sales dollar we keep. Planners and finance teams talk in margin, because sales is the number everything else is measured against. When a plan says "58% margin", it means 58 cents of every sales dollar is gross profit.

Why markup is always the bigger number

On any product that makes money, the cost is smaller than the price. When you divide the same profit by a smaller number, you get a bigger answer. So markup is always higher than margin for the same product.

Margin can never reach 100%. That would mean the product cost nothing. Markup has no upper limit. A product that costs $5 and sells for $50 has a 900% markup but a 90% margin.

Switching between markup and margin

Sometimes you only have one of the two numbers. You can switch between them without knowing the price or the cost. Write the percentages as decimals first, so 60% becomes 0.6 and 150% becomes 1.5.

Check it with the scarf. The markup is 1.5. Margin = 1.5 ÷ (1 + 1.5) = 1.5 ÷ 2.5 = 0.6, which is 60%. Going the other way, 0.6 ÷ (1 − 0.6) = 0.6 ÷ 0.4 = 1.5, which is 150%. Both match the worked example.

Setting a price from a target margin

Planners often know the margin the business needs and want the price that delivers it. This formula gives the price before tax.

A common mistake is to add the margin percentage on top of the cost: $14 plus 65% is $23.10. That price gives a profit of $9.10 and a margin of only 39.4%. Always divide by (1 − margin). Never multiply by (1 + margin).

Practise

The drill below gives you fresh numbers each time. Try to work each one on paper before you check. Then try the two fixed questions.