Markup and margin are common accounting terms that are often used when setting prices for your products.
A lot of people think they are the same and use them interchangeably, but that is wrong.
There is a clear distinction between the two terms.
Markup is the amount that is added to the cost of a product to get the price that it sells for.
While the difference between the selling price and the sourcing price is called the margin.
If that doesn’t make sense, don’t worry.
In this article, we’ll talk about how markup and margin are different, how to figure them out, and a lot more.
So let’s get started!
What Is Markup?
Markup is the amount by which the price of a product is raised before it is sold.
Let’s say you buy something for $30 per unit and then raise the price to sell it for $50 per unit.
In this case, the price of $50 is the result of a markup of $20, which is about 66.7%.
To figure out this markup percentage, divide the added cost by the cost of sourcing and then multiply the result by 100.
What Is Margin?
Margin is the difference between how much a product costs to buy and how much it costs to sell.
So, if you sell an item for $50 and it cost you $30 to get it, your margin is $20, which is 40%.
The Difference between Markup and Margin
After reading about what markup and margin are, it’s easy to see why people sometimes get them mixed up.
Let’s just say that the main difference between markup and margin is that markup is the extra cost of a product on top of its sourcing price. While margin is just the difference between how much a product costs to buy and how much it costs to sell.
So, if you buy a product for $30 and want to keep a 40% profit margin, you’ll have to set the final selling price at $50, which is a 66.7% markup.
If that sounds confusing, don’t worry. We’ll talk about how markup and margin are calculated in the next section.
How to Calculate Markup and Margin?
If you want to figure out your markup percentage, divide your markup by the price of the item and then multiply the result by 100.
Use the following formula to figure out the markup percentage:
Markup % = (Added Cost/Sourcing Cost) * 100.
Using the same example as before, let’s plug in the cost of sourcing, which was $30, and add the cost of $20 to the equation:
Markup = (20/30) * 100 = 66.7%.
This shows that if you buy a product for $30 and then sell it for $50, you’re making a 66.7% markup.
In the same way, you can figure out the margin by subtracting the product’s final selling price from its cost to source. Remember that margin is always worked out as a percentage.
To figure out the margin, you could use a formula like this:
Margin = ((Final Price – Sourcing Price) / Final Price) * 100
Now, let’s use the formula for margin on the example where the final price is $50 and the sourcing price is $30:
Margin = ((50 – 30) / 50) * 100 = 40%
If math isn’t your favorite subject, you should know that we multiply by 100 to figure out the percentage.
Markup and Margin Chart
Markup and margin are closely related, so it shouldn’t be a surprise that they also work together in a predictable way. If you know how much one thing is worth, it’s not hard to figure out how much the other thing is worth.
But if you want to avoid all the trouble, here is a chart with some of the most common markup vs. margin rates:
Note: All of the markup percentages have been rounded from decimals to the nearest whole number.
How to Convert between Markup and Margin
We just said that markup and margin work together in a predictable way and that you can figure out the value of one by knowing the value of the other.
Well, let’s look at some formulas that will help you change between markup and margin.
Markup to Margin Conversion
To go from markup to margin, you can use the following formula:
Margin = (Markup / (1+ Markup)) X 100
Let’s go back to the example we’ve been using since the beginning of this article. Remember how we figured out that a 67% markup would give us a 40% margin, which you can also see in the chart?
Well, we’ll show you how this formula works by using the same numbers:
Margin = (0.67 / (1 + 0.67)) X 100 = 40%
The end result sure looks like something we’ve seen before, doesn’t it? All we did was round the answer up or down to the nearest whole number.
Margin to Markup Conversion
The formula for turning margin into markup is very similar to the one we just went over. All you have to do is change markup to margin and the plus sign to a minus:
Markup = (Margin / (1 – Margin)) X 100
Now it’s time to put this formula to the test. To do so, we’ll go back to our favorite example (you should have those numbers in your head by now).
So, let’s plug the 40% margin we calculated for a 67% markup into the formula:
Markup = (0.40 / (1 – 0.40)) X 100 = 67%
See how this formula brings us back to the percentage we used to figure out the markup? So, that’s all it takes to change margin into markup.
When to Use Markup/Margin?
You should use the markup percentage to figure out how much to charge for your products.
Choosing the markup percentage is a difficult step that depends on a number of things, such as the cost of manufacturing or sourcing, the quality of the product, and the competition.
With margin, you can figure out how well your store is doing and how much money you could be making.
How to Calculate Markup/Margin on Products
Several things affect how the markup or margin on a product is calculated. So let’s give them some light:
Type of Business
The type of business you run will affect your markup/margin percentage a lot.
For example, if you run a wholesale business, you should keep a lower markup of around 18–25%, which is about the same as a margin of 15–20%.
That’s because you’ll probably be selling a lot of those products.
In the same way, if you have an online store and use a fulfillment method like dropshipping, you need to be smarter about how you price your products. Check out our Dropshipping Profit Margin guide to learn more about this.
In the end, there isn’t one way to set the markup for your product that works for everyone. Depending on the type of business you have, you have to try different things to see what works best for you.
You can pretty much charge any price you want for the things you sell. The question is, who would buy them at those prices if you don’t have the credibility to back them up?
So how much of the markup or margin you keep depends a lot on how much experience you have.
We would tell new business owners to start with a lower markup so they can build a strong customer base.
If you don’t want to do that, you could at least think about giving customers a discount to get them to try your products.
In either case, it will be hard to get away with high prices at first unless you have a well-known brand name or at least a track record in the industry.
That’s why your main goal at first should be a lower markup, so you can compete with brands that are already well-known.
Unless you have a monopoly on a product, you can only set a certain amount of markup.
Usually, that percentage is based on the average of what your competitors do.
If you and your competitors are selling the same thing, just look at how much they are charging and set your markup around that.
And if you set a higher markup than your competitors, you should make sure the quality of your products is better to back it up.
Overall, market research is a key part of any business that wants to do well.
When setting the markup price, it’s important to think about how the goods get to you.
Even if you can get the product for a low price, it doesn’t matter if the shipping costs eat up all your profits.
This is a mistake that a lot of new business owners make.
They focus so much on the cost of sourcing that they forget about all of the other costs that come with running a business.
So, make sure the price you charge for your product is at least enough to cover the costs of running your business.
And if you can’t figure out how to fix the supply chain problems, we suggest hiring a professional product fulfillment service.
There are a lot of ways to market your business in the world we live in today. Some of the most common are dropshipping marketing, social media marketing like Tiktok, Shopping ads, and using Instagram shoutout to get help from influencers.
The point is that you can spend as much or as little as you want to market your business. There’s no limit.
We think you should set your markup price based on how much money you plan to spend on marketing.
Otherwise, it doesn’t matter how many sales you make if all your money goes to marketing and you make little or no money.
Even if you want to be aggressive with your marketing and put all your money into it, you should still have a long-term plan. And most importantly, you should know who you’re writing for.
Once you have more customers and your brand is known, you can start slowly raising your markup.
The type of product you are selling also has a big impact on the price range.
For example, if you only sell potato chips, you can’t set a markup of 300%.
This is also one reason why planning the markup isn’t the only thing you have to worry about.
If you want to open an eCommerce store, product hunting is the most important thing to do. We’ve already written a lot about this topic in another article.
So, to sum it up, if you have a certain percentage of markup in mind, look for a product that will let you get away with it.
FAQs about Markup and Margin
Is There a Difference between Profit and Margin?
Profit is measured in dollars, while margin is always measured in percentages. This is a small but important difference.
Aside from that, both profit and margin are relative to the situation because they help figure out how much money a business is making after paying for the costs of getting the money and running the business.
Can Markup and Margin Be Used Interchangeably?
No, “markup” and “margin” are not the same thing. Even though their interactions are predictable, they can’t be used in place of each other. But you can use the value of one to figure out the value of the other.
Markup vs. Margin, What to Use for Determining Selling Price?
Markup is usually used to figure out how much a product will sell for. On the other hand, margin is used to figure out how well a business is doing financially and how much money you’re making on each sale.
Markup and margin are two different things that every business owner needs to know. It’s a key part of setting prices for your products.
In this article, we’ve given you a number of examples that show how these terms are different from one another.
Just remember that when you’re looking for products, your main goal should be to find a good balance between price and quality.