Whether your business is a global enterprise or a local boutique, you likely deal with markups and margins every day. They are both key accounting terms—but many small business owners confuse markup vs. margin. Understanding the differences can help you make more informed decisions about your business’s performance and how to set the right prices.
This article will clarify gross margin vs. markup and help you understand the critical differences between the two. We’ll also show you how to calculate markup and margin with simple formulas, and show how the right inventory management software can help you keep better margin and markup records.
What’s the difference between markup and margin?
Markup is the amount by which your business has increased the cost price of a sellable item. In other words, it’s the extra amount you charge your customers on top of what you’re already paying your supplier for a product. Margin (or gross profit margin) is how much revenue a business brings after deducting the cost of goods sold. In other words, markup is a percentage of a good’s costs, and margin is a percentage of revenue.
These numbers might sound similar, but they represent two very separate things. And if you confuse the two, you might over or undercharge your customers, make a mistake on important accounting documents, or mess up your revenue forecasting.
The confusion stems from two concepts that are quite alike but represent two different components of accounting. Profit margin is about revenue, and markup is about costs. Markup is used to set prices, and margin is used to evaluate performance.
When to use markup
Businesses use markup to set an appropriate selling price. In general, the higher the markup, the more profitable an item.
Often, different types of businesses have standard markup rates or ranges of markup rates. For example, a supplier who sells huge amounts of products may mark up their items 7% to 10%, but a gift shop in a touristy area might mark up their products by 50%.
Say your business sells windshield wiper blades. Your cost price from your supplier for one blade is $8. And your selling price (the price you ask your customers to pay) for that same blade is $20. That means you’ve marked up the cost of this product by $12—or 150%.
You can calculate your markup percentage by dividing markup in dollars by cost price in dollars, then multiplying by 100.
How to markup products
Marking up products isn’t as simple as choosing how profitable you’d like your business to be. Instead, you’ll have to consider things like perceived value, shipping costs, transaction costs, and how much your competitors are charging.
In fact, the easiest way to start pricing your goods is to research what similar companies are charging customers. You want your business to turn a profit, but you also want to retain customers and offer value. This is especially true if you have a lot of competition, or there isn’t something inherently unique about what you sell.
When to use margin
Your business should use margin to judge performance and profitability and paint a clearer picture of how your company operates. It’s also great for looking back, either quarterly or annually. That’s because gross margin can be compared to net margin, shining light on other operating costs.
Say your company creates neon signs that cost $120 to manufacture. If you sell those signs for $300, your profit margin is $180. That’s a profit margin of 60%.
You can calculate profit margin as a percentage by dividing the profit margin in dollars by the sale price in dollars, then multiplying by 100.
Markup vs. margin: Real-life example
Let’s use the same product to clarify the differences between markup and margin better. These two accounting terms might seem interchangeable because they use the same two data points in their formulas, but they’re not.
Imagine your business sells eco-friendly cleaning supplies. Your best-selling product is an all-purpose spray. You purchase this spray from your supplier at $5 a bottle and sell them to your customers online for $10 a piece.
Cost price: $5
Selling price: $10
Using the markup vs. margin formulas, here’s what we get.
( selling price – cost price / cost price ) x 100
(10 – 5 / 5) x 100 = 100%
The eco-friendly all-purpose spray has a markup of 100%.
( selling price – cost price / selling price ) x 100
(10 – 5 / 10) x 100 = 50%
The eco-friendly all-purpose spray has a gross margin of 50%.
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The right inventory management software can also help your company stay on top of profit margins and product markups. Using Sortly, it’s easy to store information like cost price, cost of goods sold, and selling price right in an item’s history. You can run reports to view all these data points at once or use your phone’s barcode or QR code scanner to learn more about these details instantly.
Whatever your company’s inventory needs and profit goals are, Sortly can help you get there by keeping you organized and making inventory management less expensive, less time-consuming, and less stressful.
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