Difference Between Profit Margin and Markup

The main difference between profit margin and markup is their calculation. Profit margin is determined by subtracting the cost of goods sold (COGS) from sales, while markup is the difference between a product’s selling price and its cost price.

• Profit margin is calculated as sales minus the cost of goods sold (COGS).
• Markup is calculated as a product’s selling price minus its cost price.

Confusing profit margin with markup can lead to accounting and sales errors, potentially resulting in underpricing or overpricing of products and affecting profits. Understanding these terms is essential for effective product pricing.

Markup vs. Margin Formula:

To illustrate, we can use the markup vs. margin formula:

Margin÷ Cost?of?Goods=Markup?Percentage

For example, to achieve a profit margin of $5 on a product with a cost price of $8, use the formula:

$5?Margin÷$8?Cost=62.5%?Markup?Percentage

You can then multiply the cost by the markup percentage and then add the original cost to determine a sales price of $13.

"The markup percentage calculation is cost X markup percentage, and then add that to the original unit cost to arrive at the sales price"

• Profit margin percentage formula: ((Sale price – Cost price) ÷ Sale Price)(100)
• Markup percentage formula:

((Sale price – Cost price) ÷ Cost Price)(100)