Many people often confuse or misuse the terms ‘Mark-up’ and ‘Margin’.
While they are similar in that they both define a different measure of profitability, they do have fundamental differences. By understanding these differences you can more accurately define your profit and pricing strategy to align with your business objectives.
Mark-up refers to the price figure added to the cost price to arrive at the sell price. For example 10% ‘mark-up’ on a product would mean it has a sell price 10% greater than its cost price. At 10% ‘mark-up’ an item that cost $5 would be sold at $5.50.
Margin is the sell price less the cost. So, using the same product pricing as above, a product sold for $5.50 – $5 cost = 50c margin.
In the this example both margin and mark-up are 50c when expressed as a numeric value, but when expressed as a percentage, there was a 10% ‘mark-up’ (on the cost price) and the margin was only 9.1% (50c as a percentage of the sell price of $5.50).
If your focus is to achieve a desired margin the following calculation should be helpful:
Desired margin ÷ Cost of goods = Mark-up percentage