What is the difference between margin and markup?
Margin (also known as gross margin) is sales minus the cost of goods sold. For example, if a product sells for $100 and costs $70 to manufacture, its margin is $30. Or, stated as a percentage, the margin percentage is 30% (calculated as the margin divided by sales).
Markup is the amount by which the cost of a product is increased in order to derive the selling price. To use the preceding example, a markup of $30 from the $70 cost yields the $100 price. Or, stated as a percentage, the markup percentage is 42.9% (calculated as the markup amount divided by the product cost).
Essentially, if you want to derive a certain margin, you have to mark up a product cost by a percentage greater than the amount of the margin, since the basis for the markup calculation is cost, rather than revenue; since the cost figure should be lower than the revenue figure, the markup percentage must be higher than the margin percentage.
The markup calculation is more likely to result in pricing changes over time than a margin-based price, because the cost upon which the markup figure is based may vary over time; or its calculation may vary, resulting in different costs which therefore lead to different prices.
The following bullet points note the differences between the margin and markup percentages at discrete intervals:
- To arrive at a 10% margin, the markup percentage is 11.1%
- To arrive at a 20% margin, the markup percentage is 25.0%
- To arrive at a 30% margin, the markup percentage is 42.9%
- To arrive at a 40% margin, the markup percentage is 80.0%
- To arrive at a 50% margin, the markup percentage is 100.0%
The calculation to derive markup percentages is:
Desired margin ÷ Cost of goods
For example, if you know that the cost of a product is $7 and you want to earn a margin of $5 on it, the calculation of the markup percentage is:
$5 Margin ÷ $7 Cost = 71.4%
If we multiply the $7 cost by 1.714, we arrive at a price of $12. The difference between the $12 price and the $7 cost is the desired margin of $5.
Why does GlobalTill differentiate between markup and margin?
The preference of store owners varies. Some like to think of their prices in terms of margin, others markup. In addition, many commercial/wholesale agreements dictate cost plus markup, whereas stores want to meet the desired margin for their retail prices.
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