Margin vs. Markup: What’s the Diff?
Our work in the staffing world brings us into contact with many different businesses, with all their various proprietary languages. Sometimes we find words used in one business misused in another. Two examples of this are the words markup and margin, which sometimes we hear used interchangeably, even though they are different ways of calculating profit. Obviously, the difference can be confusing. But it doesn’t have to be.
Most retail businesses do their calculations based on markup. A markup is an amount added to a wholesale cost price in calculating a selling price. This amount takes into account overhead and profit. Example: A candy bar purchased at wholesale for $1 and sold for $1.50 has a 50% markup.
Virtually every other business calculates margin, which is the percentage of the final selling price that is profit. That’s because—unlike retailers—other businesses put lots of different ingredients at lots of different prices into the final product. So let’s say we manufacture candy bars, each of which requires $.50 worth of ingredients and other resources to manufacture. If we sell the candy bar for $1, that’s a 50% margin. In other words, half the selling price is profit. Note that when we calculate margin, rather than markup, on the retailer’s candy bar transaction (purchased wholesale at $1 and sold at $1.50), the margin comes out at 33.33% (one third of the selling price).
One more thing: when we talk about profit in this context, we’re talking about gross profit, of course, before fixed costs and other overheads, such as rent, wages, taxes, etc. are taken out.
Hope this helps!