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Is there a difference between mark up and margin? The answer is yes - and it is important to understand the difference in order to be able to confidently state that the selling price that you have quoted is profitable.
Both mark up and margin use revenue and costs, but mark up shows the percentage of costs whereas margin shows the percentage of income. This is why your mark up is always bigger than your margin, despite referring to the same amount of money.
Using these terms incorrectly can result in price setting that is too high or low, leading to lost sales or lost profits.
Mark up is the percentage of the cost price that you add on to get the selling price.
Mark up percentage = (Selling price - Cost price)/Cost Price. You then need to divide this by 100.
For example, if the cost price is £100 and the selling price is £115 the mark up percentage is 15%.
Margin is the percentage of the final selling price that is profit.
Margin % = (Selling price - Cost Price)/Selling Price. This also needs dividing by 100 to get the percentage.
Using the same example above, if the cost price is £100 and the selling price is £115 the margin percentage is 13%.
If the selling price of a service or product is based on a 15% mark up, the gross margin is actually 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% - you must divide your margin by 100 to be able to complete the below calculation, just as you multiplied by 100 in the above calculations. Therefore a 15% margin would be 0.15.
Cost price = £100
Therefore the selling price = £100 / (1-0.15)
We hope you'll find this helpful, and this guide will aid you in the minefield of negotiating pricing with your clients. If you would like a confidential discussion about your current career or are looking for a change, get in touch for a confidential chat with one of our specialist Consultants.