What Is the Difference Between Markup and Margin?
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Talk to our experts- Markup vs margin
- Markup and margin both measure the profit on a sale, but they divide it by different numbers. Markup is the profit divided by the cost of the item. Margin is the same profit divided by the selling price. Whenever an item sells for more than it costs, its markup percentage is higher than its margin percentage.
How it works
The difference between markup and margin is the base each one uses: markup measures gross profit against cost, and margin measures the same gross profit against the selling price.
- Gross profit: selling price - cost
- Markup: (selling price - cost) / cost x 100
- Margin: (selling price - cost) / selling price x 100
To convert one into the other, write both as decimals:
- Markup to margin: margin = markup / (1 + markup)
- Margin to markup: markup = margin / (1 - margin)
So a 25% markup is a 20% margin (0.25 / 1.25 = 0.20), and a 50% markup is a 33.3% margin (0.50 / 1.50 = 0.333).
Markup vs. margin in pricing and reporting
Markup is the number you use to build a price up from a cost, as cost-plus pricing does. Margin is the number Shopify's gross profit reports show, because they measure profit against net sales.
IRS Publication 334 joins the two. It tells retail and wholesale businesses they can check the accuracy of their gross profit figure by dividing gross profit by net receipts and comparing that percentage to their markup policy. In the IRS example, a retail business with $300,000 of net receipts and a $200,000 cost of goods sold has a gross profit of $100,000, which is 33 1/3% of net receipts. The IRS states the markup policy in that example as a gross profit of 33 1/3% on sales. Measured against cost, the same $100,000 is a 50% markup ($100,000 / $200,000).
This is general information, not tax or accounting advice.
30% markup vs. 30% margin
A margin target applied as a markup leaves the price short. Say an item costs $70.00 and the target is a 30% margin:
- Priced for a 30% margin: $70.00 / (1 - 0.30) = $100.00, a $30.00 profit and a 30% margin.
- Priced with a 30% markup: $70.00 x 1.30 = $91.00, a $21.00 profit and a 23.1% margin ($21.00 / $91.00).
Example
A distributor buys a bearing for $60.00 and sells it for $80.00.
- Gross profit: $80.00 - $60.00 = $20.00
- Markup: $20.00 / $60.00 = 33.3%
- Margin: $20.00 / $80.00 = 25%
A contractor account gets 10% off: $80.00 x 0.90 = $72.00. Profit falls to $12.00, so the markup drops to 20% ($12.00 / $60.00) and the margin to 16.7% ($12.00 / $72.00).
On Shopify
Shopify keeps what a product costs you in the Cost per item field. For a product you resell, you can enter the price you paid the manufacturer, excluding taxes, shipping or other costs. If you make the product yourself, you can enter a value based on your labor and material costs. If a product has variants, you edit each variant to add its cost per item.
Shopify's gross profit reports, such as Gross profit by product, calculate gross margin as ([net sales - cost] / net sales) x 100. Shopify notes that the Cost per item field contains static data, so profit report data is only relevant to a specific point in time, and suggests running financial reports in another business system, such as an ERP or accounting system.
How Uncap helps
Uncap's guide to B2B ecommerce pricing strategies draws the same line: a cost-plus pricing markup is measured against cost, while Shopify's profit reports measure margin against sales. For a Shopify B2B implementation, the guide says, your ERP maintains the cost records, applies the markup rules, and outputs list prices, which feed to Shopify as the baseline catalog price.
Sources
Frequently asked questions
Is 30% markup the same as 30% margin?
No. A 30% markup adds 30% of cost to the cost, while a 30% margin keeps 30% of the selling price as profit. On a $70.00 item, a 30% markup gives a $91.00 price and a 23.1% margin; a 30% margin needs a $100.00 price.
How do I convert 33% margin to markup?
Divide the margin by one minus the margin, as decimals: 0.33 / (1 - 0.33) = 0.33 / 0.67 = 0.493. A 33% margin is a markup of about 49.3%.
How do you calculate markup?
Subtract the cost from the selling price, divide the result by the cost and multiply by 100. An item that costs $60.00 and sells for $80.00 has a markup of ($80.00 - $60.00) / $60.00 x 100 = 33.3%.
What is a 50% markup on $100?
A 50% markup on a $100.00 cost adds $50.00, for a selling price of $150.00. The $50.00 profit is a 33.3% margin on that price ($50.00 / $150.00).
