Markup vs. Margin: What’s the Difference and How to Calculate It
Stitch Labs is a retail operations management platform for scaling, high-growth brands looking to increase their bottom-line.
Almost every scaling retailer has one goal: to increase the bottom line. But increasing the bottom line doesn’t just mean increasing sales. There are other ways that businesses can streamline for efficiency and use creative strategies to increase profits from existing sales — that’s where markup vs. margin comes into play.
Retailers mark up the prices of products before selling them to customers, and they earn a margin on each sale, shown clearly on their retail reports.
But understanding what’s the difference between markup and margin goes a little further than that. Let’s look at how they compare and how to calculate markup and margin.
What is markup?
Markup is the amount that a retailer adds to price of a product before selling it to a customer. The markup ratio is the percentage difference between the actual cost of goods sold (COGS) and selling price.
Retailers use markup to increase the selling price of products so that they can cover overhead and turn a profit. Without markup, retailers wouldn’t make any money off of their sales because they’d be selling products for the same cost to acquire them, essentially breaking even.
The higher the markup, the higher the price. Businesses may use a markup ratio if they sell several different products and need to ensure profitability across the board. In some cases, a flat markup of $X is added to every product, regardless of how much it cost to produce.
You may have also heard the term “retail markup,” which many use to describe the difference in price from wholesale and direct-to-consumer.
What is margin?
Margin is the amount of profit that a retailer makes on a sale, after accounting for the COGS. This is essentially the money that a retailer can put into their bank account after making a sale. Margin, or gross profit margin, is calculated by subtracting the revenue from the COGS.
Businesses will typically calculate the margin percentage or gross margin ratio, which is the percentage difference between the selling price and the COGS.
In this case, the higher the margin, the higher the profits for the business. Some retailers have a margin goal that they work towards for all products. Margin also plays a major role in demand forecasting, budgeting, inventory accounting, and other core business tasks.
Markup vs. margin: What’s the difference?
When it comes to markup vs. margin, there are many commonalities but also key distinctions. Let’s start with what markup vs. margin similarities there are:
- Both markup and margin use COGS and price as data inputs.
- Markup and margin are closely related to one another.
- Understanding both can help retailers price more profitably.
But when it comes to discussing what is the difference between markup and margin, the list is a bit longer.
When talking about markup, we’re looking at the cost or price of the item for the customer. When we look at the margin, we’re analyzing the monetary value to the business. This more of a behind-the-scenes metric, whereas markup is customer-facing.
In comparison to markup, margin provides a more accurate look at actual earnings. That’s because markup uses the price as the divisor, whereas margin is based on the true cost to the retailer. Markup often overestimates earnings, and it doesn’t account for indirect costs.
But that doesn’t mean markup holds no value. In fact, markup is where you should get started. It’s an easier metric to wrap your head around, for one, but it also affects your margins. While markup isn’t a direct input into the margin formula, it does affect the price — which is one of margin’s inputs.
Once you apply markups, you can assess how that affects your margins.
Also, basing your pricing on margins (more on that later) makes it easier to predict profitability than if it were based on markup. Pricing based on markup may lead to significant spikes or drops in your profits.
How to calculate markup and margin
Unfortunately, we’re unaware of any margin vs. markup calculator. But, before we dive into the mathematics behind how to calculate markup and margin, let’s define some of the variables we’ll be using:
- Price/revenue: selling price to customer
- Cost/cost of goods sold (COGS): total price to product item
To calculate markup, use this formula:
Markup = price – COGS
To calculate percentage, use this markup formula:
Markup percentage = (price – COGS) / COGS
Now let’s look at a hypothetical example to put the markup price formula to work:
You sell clothing and accessories at your store. For the sock product that you carry, you’ve calculated that the COGS is $5/pair. Customers can buy these socks for $15/pair. Here’s how to do the calculation using the markup formula:
Price = $15
COGS = $5
$15 – $5 = $10
The markup is $10. To calculate the markup ratio:
($15 – $5) / $5 = $10 / $5 = 2
That means that the markup ratio was 2:1. In other words, the markup was 200%. You marked up the price of the socks by 200%.
Using the percentage is valuable because this guarantees a certain level of profit, regardless of fluctuations in production costs.
For instance, let’s say you always mark up the socks by $10. The COGS goes up significantly; it’s now $15 to produce a pair of socks. You sell them for $25, a 40% markup. You’re still making $10/pair, but your profit margin has decreased. If you used a fixed markup of 200%, you’d sell the socks for $45/pair, increasing your profit margin.
And that segues us into the next section: the margin formula.
To calculate margin, use this formula:
Margin = price – COGS
To calculate margin as a ratio to then get a percentage, use this formula:
Margin = (price – COGS) / price
Let’s look at our example again. For the socks with $5 COGS that go for sale at $15/pair, you’d calculate the following:
Price = $15
COGS = $5
$15 – $5 = $10
Your gross profit margin is $10/sale. To get the margin as a percentage, which is more useful, you’d do the following:
($15 – $5) / $15 = $10 / $15 = 0.67
The gross profit margin ratio is 0.67, and the gross profit margin is 67%. Note how the $ amount for the markup and margin were the same, yet the percentage is different. This is another example of how the percentage is more insightful.
Remember how our COGS changed to $15/pair? When you sell them for $25/pair, the margin is 40%. But when you sell them for $45/pair, the margin is 67%. Keeping a fixed markup as a percentage can help you keep consistent profit margins — again, regardless of fluctuations in COGS.
Margin vs. markup chart
We’ve seen what margin and markup are, how they’re different, and a bit of how they’re related. The margin vs. markup chart further illustrates the relationship between the two metrics.
As demonstrated in our example above, when you adjust the markup, you’re also affecting the margin. You can use a margin vs. markup chart to easily correlate the two metrics. This is helpful if you’ve set a profit margin goal, so you can identify the markups needed to help you attain that goal.
Markup vs. margin: How to use them in pricing
Many brands use markup and margin in their pricing strategies. As we’ve briefly mentioned earlier, you might have a gross profit margin goal. Establishing that target margin will help you determine how much to mark up products.
Some retailers have markup-based pricing. Also noted before, this fixed markup means that you add a certain dollar amount or percentage (in dollars) to the COGS to establish the price for the customer. This results in varying margins.
But markup and margin aren’t the only factors for pricing. Remember those $45 socks? They normally sold for $15/pair. If your COGS went up drastically, and you increased the price $30, it’s unlikely that customers will still want to purchase.
Savvy data-driven companies know that data isn’t meant to be looked at through a single lens. The metrics come together to paint the bigger picture of what’s happening in your business and with your customers. Markup and margin as just two pieces of the bigger puzzle.