Markup and margin are two ways of looking at the same thing depending on whether your starting point is cost or selling price for a product.
For any product, the gross profit formula is used to calculate gross profit. Gross profit, sometimes referred to as gross margin, is the difference between the selling price and the cost price of a product.
The gross profit formula for a product is written as:
Whats this got to do with Markup vs Margin?
Quite simply, markup is profit divided by the cost price, and margin is profit divided by the selling price.
An Example or Markup vs Margin
Suppose the selling price is 60, and the cost price is 40, then the profit is given as follows:
Profit = Selling price - Cost price Profit = 60 - 40 = 20 Markup = Profit / Cost price Markup = 20 / 40 = 0.5 Margin = Profit / Selling price Margin = 20 / 60 = 0.3333
Margin and Markup Percentage Formula
Instead of expressing the markup and margin as decimals, as shown in the above example, it’s normal to express them as percentages. This is done by multiplying the decimal value by 100%. Using the numbers in the above example, we can use either
Markup = 0.5 or Markup Percentage = 0.5 x 100% = 50% and,
Margin = 0.33 or Margin percentage = 0.3333 x 100% = 33.33%
When to use Markup vs Margin
The decision to use markup vs margin will depend on what information is available to the business. Depending on the circumstances a business will either know is cost price or selling price, and its markup or margin.
Selling Price and Margin Known
If you know the selling price, then it’s easier to use the margin to calculate the profit and the cost price. This often arises when retailers for example, need to meet a given selling price point, and knowing that and the margin they want to achieve, need to work out what cost price they have to buy at.
If your margin percentage is 33.33% and your selling price is 90, then you can easily work out the profit as follows:
Profit = Margin x Selling price Profit = 33.33% x 90 = 30 Cost price = Selling price - Profit Cost price = 90 - 30 = 60
Notice that the cost price is also given by
Cost price = (1 - Margin) x Selling price Cost price = (1 - 33.33%) x 90 Cost price = 66.67% x 90 = 60 as before.
Cost Price and Markup Known
If however you know the cost price, then its easier to use markup to calculate the selling price and the profit. This can occur when a business knows its product costings and needs to calculate the required selling price to achieve a given markup.
If the markup percentage is 50% and your cost price is 60, then the profit is
Profit = Markup x Cost price Profit = 50% x 60 = 30 Selling price = Cost price + Profit Selling price = 60 + 30 = 90
Notice that the selling price is also given by
Selling price = (1 + Markup) x Cost price Selling price = (1 + 50%) x 60 Selling price = 150% x 60 = 90 as before.
A Word on Cost Multipliers
As we have seen above, the markup is used to calculate the profit on a product when we know its cost. Quite often a business will be trying to calculate the selling price when it knows the cost and the required markup. To do this quickly the business will use a multiplier on cost, this multiplier is given by
For example if for a retailer the retail markup is 50% or 0.5, then the cost multiplier is given as follows:
Cost multiplier = 1 + Markup Cost multiplier = 1 + 0.5 = 1.5
So if the cost price is 60, we can quickly calculate the selling price as
Selling price = Cost multiplier x cost price Selling price = 1.5 x 60 = 90.
Convert Margin to Markup
If the margin is known the markup can be calculated with the following formula:
So for example if the margin is 33.33% or 0.3333 them the markup is given as follows:
Markup = Margin / (1 - Margin) Markup = 0.3333 / 1 - 0.3333 Markup = 0.3333 / 0.6667 = 0.50
Convert Markup to Margin
If the markup is known the margin can be calculated with the following formula:
So for example if the markup is 50% or 0.5 then the margin is given by
Margin = Markup / (1 + Markup) Margin = 0.5 / (1 + 0.5) Margin = 0.5 / 1.5 = 0.3333 or 33.33%
A margin markup converter calculator is available for download in Excel format by following this link Margin Markup Calculator and Converter or you can use our handy reference table to convert margins from 1 to 99% to the corresponding markup and cost multiplier by following this link Margin vs Markup Tables.
Markup vs Margin Calculator Download
We have seen that the markup and margin can be used in numerous ways depending on the information available. We have produced a markup vs margin calculator to enable a business to calculate selling price, cost price, profit, margin, markup, and cost multiplier on entering any two of the values.
The markup vs margin calculator is available for download in Excel format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.