Markup vs Margin
Is there a difference? Absolutely...
Put simply, margin & markup ratios are expressed as follows.
Markup = Profit/Cost
Margin = Profit/Sell
As you can see the ratios for Markup and Margin are not the same however the two terms seem to get confused and interchanged with each other more & more often. Many mistakenly believe that if a product is marked up, say 25%, the result will be a 25% gross margin. However, a 25% markup rate produces a gross margin percentage of only 20%.
Let's take a closer look at the actual math using the two examples below.
Margin or gross profit is defined as sales minus cost of goods sold. If a retailer sells a product for $10 which had a cost of $8, the gross profit or margin is $2. The gross profit ratio or the margin ratio is expressed as a percentage of sales.
In our example the margin ratio is expressed as ($2 ‘Profit’ / $10 ‘Sell’ = 20% ‘Margin’).
Markup is typically used to show the difference between a product's cost and its selling price. In our example, the product had a cost of $8 and a markup of $2 resulting in a selling price of $10. The $2 markup is the same as the $2 gross profit. However, the markup ratio is often expressed as a percentage of cost.
In our example the markup ratio is expressed as ($2 ‘Profit’ / $8 ‘Cost’ = 25% 'Markup').