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Mark up vs. margin...

Posted by
04 Sep 2012

Is there a difference between mark up and margin? The answer is yes - and it is important to understand the difference, to be able to confidently state that the selling price that you have quoted is profitable.

Mark up

Mark up is the percentage of the cost price that you add on to get the selling price.

Mark up % = (Selling price - Cost price)/Cost Price

Margin

Margin is the percentage of the final selling price that is profit.

Margin % = (Selling price - Cost Price)/Selling Price

Many businesses makes the mistake of using mark up to calculate the selling price, and assume the mark up percentage is their gross profit margin. Unfortunately this is not the case.

If the selling price of a service or product is based on a 15% mark up, the gross margin is actually 13%. The example below highlights this:

Cost price = £100

Mark up = 15%

Therefore the selling price = £115    [£100 + (£100 x 15%)]

The Margin % = Selling Price - Cost Price / Selling Price

                            = (£115 - £100) / £115

                            = 13%

For a business it is always advisable and safer to use margin to calculate a selling price as it measures how much of the sale is profit. Therefore decide on a desired profit margin and then using the cost, calculate the selling price that delivers it.

To calculate selling price based on margin:

Selling Price = Cost Price / (1 - margin %)

For example, if a business requires at least 15% margin for a sale to be profitable what would their selling price be?

Margin = 15%

Cost price = £100

Therefore the selling price = £100 / (1-0.15)

                                        = £117.65

I hope you'll find this helpful, and this guide will aid you in the minefield of negotiating pricing with your clients.

 

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