Since the terms can be used interchangeably, knowing how to calculate margin vs markup can be tricky. They’re both measures of profitability, usually expressed as a percentage, but markup measures how much you’ve increased prices relative to cost, while margin represents what proportion of a sale is profit.
If that still sounds confusing, don’t worry. In this article, we’ll walk you through the formulas, provide examples that clearly define the difference, and discuss some advanced use cases for margin and markup.
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Overview
Understanding margin and markup is important for ensuring profitably set prices. If they’re too low or too high, this can result in lost sales or revenue. But before we learn to calculate markup vs margin, there are some essential definitions we need to cover.
Revenue is the money your company earns from selling products or services.
Cost of goods sold (COGS) is the total direct cost of producing a good or service. This may include raw materials, equipment, and wages paid to workers directly involved in the process.
Operating expenses include all indirect costs of running a business, such as rent, marketing, and administrative costs.
Gross profit refers to revenue left over after deducting COGS.
Operating profit measures profit after removing both COGS and operating costs.
Net profit is the truest measure of profit, representing what remains after deducting all business expenses.
For more detailed information, read our article on net vs. gross income.
How Do You Calculate Margin?
Profit margin is a ratio that measures how much your business earns on a product or service. There are many variations of the term: net profit margin, operating profit margin, unit margin, and gross profit margin. We’ll cover each of these below, but when financial professionals talk about “margin,” they usually refer to gross margin: profit from a sale after deducting COGS.
Margin Formula
The margin calculation formula yields percentage profit by deducting costs from revenue, dividing by revenue, then multiplying by 100.
Margin = (Revenue – Costs)/Revenue x 100
Knowing how to work out margin is more complicated than this formula might suggest. Depending on what’s included, there are many different margins, each providing unique insights into your business.
How Do You Calculate Markup?
While margin shows how much profit you’re making as a percentage of revenue, markup shows similar information as a percentage of cost. Markup calculations are an essential tool for financial modeling, allowing business owners to determine how many sales and at what price they’ll need to reach different levels of profitability.
Markup Formula
Markup refers to how much a single unit’s price is increased over its cost. The markup formula deducts costs from the sale price, then divides by cost, and finally multiplies by one hundred.
Markup = (Sale Price – Cost)/Cost x 100
Markup vs. Margin Calculation Examples
Sometimes, it’s easier to learn through an example than a formula or definition.
Let’s suppose your company white labels software as part of a comprehensive services package. Your clients could go directly to the supplier, but it’s easier to go through you since you manage other aspects of their business as well.
Since markup is usually calculated on a per-unit basis, we’ll do a unit margin calculation as well. Your supplier charges $70 per user and you charge customers $100. After running calculations through their respective formulas, you discover that you’re charging a 42% markup while running a 30% margin.
How to Calculate Markup From Margin
Follow these steps. We’ll use the same figures as in our previous example, beginning with a margin of 30%.
How to Calculate Margin From Markup
To calculate margin from markup, follow a similar process as above, but in reverse. We’ll start with a margin of 42%.
Following these steps should give you an idea of how margin and markup work together. Once you’re dealing with larger numbers in your business, it will make sense to use a spreadsheet. Additionally, accounting software may have features that can do margin-to-markup calculations for you.
Keep in mind that making these calculations in the real world will involve more than in our examples. A hurdle many business owners face is a lack of quality data. Sometimes they’re commingling funds between their business and personal life. Other times, they don’t have a method for tracking business expenses. If these challenges sound familiar, schedule a consultation with an indinero accounting services team member. We’d be delighted to help implement an easy-to-use system for your business.
How to Use Markup and Margin In Your Business
In January 2024, the NYU Stern School of Business compiled a margin analysis of over 6,000 businesses across nearly one hundred sectors. We’ve pulled a handful below.
Start by comparing your company to industry averages. If they differ, ask yourself why.
Are you charging enough for products?
Are your costs too high?
What strategies can you implement to improve margins?
These are the sorts of questions indinero virtual cfo, Brian Johnson, pursues every day. Here’s a firsthand experience he had with a client:
“We have a client who came to us when they were breaking even, and the founder was concerned about whether he was going to make it. We ran through a financial analysis of their margins and discovered that some of their products, after considering fixed costs and variable profits, weren’t making money. So over six months, we achieved profitability by cutting his cost structure and right sizing his business.”
Margin and markup analysis can also bring good news. If you’re outperforming the competition, it may be a good time to pursue an exit through amerger or acquisition, additional investment fromventure capitalists, or further growth by applying for a business loan.
If you need help with this sort of analysis, accounting, or bookkeeping, contact an indinero virtual CFO services expert today.
