Margin vs markup
These two terms are often confused. Margin is profit as a percentage of the selling price: (revenue − cost) ÷ revenue. Markup is profit as a percentage of the cost: (revenue − cost) ÷ cost. A product that costs 60 and sells for 100 has a profit of 40, a margin of 40% and a markup of 66.7%.
Setting a price for a target margin
To reach a margin m, divide the cost by (1 − m). For a cost of 60 and a target margin of 40%, the price is 60 ÷ 0.6 = 100. A common mistake is to add the margin percentage to the cost, which gives a lower margin than intended.
What is a good margin?
It depends on the industry. Software can have very high margins, while retail and food businesses often work with much smaller ones. Compare yourself with similar businesses and remember that gross margin does not include overheads such as rent, salaries and marketing.
- Review your costs regularly.
- Test small price increases.
- Focus on the products with the best margin.
Frequently asked questions
What is the difference between margin and markup?
Margin is based on the selling price; markup is based on the cost. For the same profit, markup is always the larger percentage.
Is this gross or net margin?
It uses the cost you enter. If you include only the direct cost of the product, it is gross margin.
Can the margin be negative?
Yes. If the cost is higher than the selling price, you are selling at a loss.