Markup and Margin are both accounting terms and are related to the selling price of a product. Both these terms can be somewhat confusing. However, if used interchangeably can cause a lot of problems with the price-setting, leading to low profits and lost sales.
Hence, it is necessary to differentiate between them as both these terms are different from each other in many ways.
Key Takeaways
- Markup refers to the percentage increase in the selling price of a product over its cost, while margin represents the percentage difference between the selling price and the cost price.
- A high markup indicates a larger profit potential for a business, whereas a high margin shows a higher actual profit realized.
- To accurately determine profitability, businesses should consider markup and margin when pricing their products or services.
Markup vs Margin
Markup is the amount added to the cost of a product or service to arrive at the selling price. It is expressed as a percentage of the cost. Margin is the profit earned on a product or service after deducting all costs and expenses. It is expressed as a percentage of the selling price.
To determine the selling price of a product cost of the product is increased with the help of an amount known as Markup.
Markup is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing the difference by the Selling Price (SP-Cost of goods sold/SP).
Markup is actually from the perspective of the buyer, and it should always be higher than Margin. Markup is calculated based on cost. It acts as a Cost Multiplier.
The margin represents the difference between sales and the cost of goods sold. Margin is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing it by the Cost of goods sold (SP-Cost of goods sold/Cost of goods sold).
Margin is actually from the perspective of a seller and hence should always be lower than Markup. Margin is calculated based on price or revenue. It represents the profit earned on total sales.
Comparison Table
| Parameters of Comparison | Markup | Margin |
|---|---|---|
| Meaning | To determine the selling price of a product cost of the product is increased with the help of an amount known as Markup. | The Margin represents the profit earned on the total sales. |
| Formula | (Selling Price- Cost of the goods sold)/ SP | (Selling Price- Cost of the goods sold)/Cost of the goods sold. |
| Basis of calculation | Markup is calculated based on cost. | Margin is calculated based on revenue or price. |
| Perspective | Markup is actually from the perspective of a buyer. | Margin is actually from the perspective of a seller. |
| Calculation | Since Markup is from the perspective of the buyer, it shall always be higher than Margin. | Since Margin is from the perspective of the seller, it shall always be less than Markup. |
| Action | Acts as a Cost-multiplier. | Represents the profit earned on total sales. |
What is Markup?
To determine the selling price of a product cost of the product is increased with the help of an amount known as Markup.
Markup is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing the difference by the Selling Price (SP-Cost of goods sold/SP).
Markup is actually from the perspective of the buyer and hence should always be higher than Margin. Markup is calculated based on cost. It acts as a Cost Multiplier.
The purpose of markup is to ensure that revenue is generated from every sale. Markup is good for understanding business and makes the user aware of the costs.
What is Margin?
The Margin represents the difference between sales and the cost of goods sold. Margin is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing it by the Cost of goods sold (SP-Cost of goods sold/Cost of goods sold).
Margin is actually from the perspective of a seller and hence should always be lower than Markup. Margin is calculated based on price or revenue. It represents the profit earned on total sales.
Margin usage increases as the business ages. Profit margins determine the actual profit made on the sale.
Main Differences Between Markup and Margin
- To determine the selling price of a product cost of the product is increased with the help of an amount known as Markup, whereas Margin represents the difference between sales and cost of goods sold.
- Markup is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing the difference by the Selling Price (SP-Cost of goods sold/SP), whereas, Margin is calculated by finding the difference between the Selling price and the Cost of goods sold and then dividing it by the Cost of goods sold (SP-Cost of goods sold/Cost of goods sold).
- Markup is actually from the perspective of the buyer, whereas, Margin is actually from the perspective of a seller.
- Since Markup is from the perspective of the buyer, it shall always be higher than Margin. On the other hand, since Margin is from the perspective of the seller, it shall always be less than Markup.
- Markup is calculated based on cost, whereas, Margin is calculated based on price or revenue.
- Markup acts as a Cost Multiplier, whereas, Margin represents the profit earned on total sales.
- The purpose of markup is to ensure that revenue is generated from every sale. On the other hand, Profit margins determine the actual profit made on the sale.
References
- https://www.sciencedirect.com/science/article/abs/pii/S0360835212002252
- https://www.sciencedirect.com/science/article/abs/pii/S1574007201100241
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