Margin Calculator

Understanding the Difference Between Margin and Markup

When companies set prices for their products and services, they need to set them at a level that allows to make the most profit. There are two main pricing methodologies that companies use — margin and markup. These terms are often used interchangeably but can cause confusion, producing very different results. Margin focuses on the profit percentage gained when selling a product or service. Markup shows the relationship between the selling price and the actual cost.

Example

John purchases bikes from a wholesaler for $100. He decides to mark them up 50% and sell them for $150. While this is a good percentage, his profit margin is lower. Since the profit on each bike is $50, only 33% of the selling price is actual profit.

Using markup instead of margin can trick businesspeople into believing they are making more profit than they actually are. If John’s goal was to make a 50% profit on each bike, the markup method would leave him short on profit. Unfortunately, this mistake can easily happen, costing businesses thousands of dollars.

Markup Versus Margin: Which is Better?

Markup and margin can yield very different results. So, which methodology is better? Generally, markup is much easier to use in a simple business model with predictable costs. Markup is perfectly fine to use when pricing most products.

Margin is excellent for long-term evaluation of how sales impact the business’s operating costs. Also, the margin is much better when costs change rapidly. Significant changes in costs can eat away your profit margin over time if not appropriately controlled. If you sell multiple products and services, the margin methodology allows you to compare their profitability. For example, a $20 item discounted by 50% will bring less total profit than a $200 item discounted by 25%.

Some businesses use a combination of the two methodologies. For example, a company may decide to use a standard markup for pricing their products but use the margin calculation to evaluate the profitability and drive decision-making regarding their product line.

Understanding the Profit Margin Formula

The formula to calculate profit margin is straightforward. However, it’s critical to understand the methodology to avoid confusing it with markup.

The formula to calculate profit margin is:

$$Profit\ margin = \frac{R - C}{R} × 100$$

• C = Cost of the product or service
• R = Revenue or sale price of the product or service

Markup Formula

If you compare the formulas to calculate margin and markup, you’ll see why they are easily confused. The gross profit is divided by the original cost instead of the sale price.

The formula to calculate markup is:

$$Markup = \frac{R - C}{C} × 100$$

Calculating Markup Percentage

Sometimes, you may not know what markup percentage was used when pricing a product. Let’s say you are new to a company and should price some products. You want to find out what markup percentage has been used historically. Knowing the sale price and cost of the items sold previously, you can quickly calculate how the product was marked up.

The formula to find the markup percentage is:

$$\frac{Profit}{Cost} = Markup\ Percentage$$

For example, if a product was sold for $500 and its cost was $425, the profit was $75. If you divide $75 by $425, you’ll see that the markup used was 17.6%.

Setting the Sale Price Using Margin

If you choose to use the margin method, you need to figure out how to calculate the appropriate selling price based on the desired margin percentage.

The formula to find the sale price is:

$$Sale\ Price = \frac{Cost}{Margin} × 100$$

Note: Margin should be a whole number (for example, you should use 60 if you want a 60 percent profit margin).

How to Use the Profit Margin Calculator

Learning how to calculate margin correctly is extremely important, especially if you work in the sales and marketing fields. Using the margin calculator is easy. All you have to do is enter two simple data points.

• Step 1: Enter the cost of the product or service. This is what the item costs to produce or acquire.
• Step 2: Enter the revenue from selling the product or service.
• Step 3: Click Calculate and review the results. The calculator will return the gross margin percentage, markup percentage, and total gross profit.

Real Example

Let’s say you open a hamburger restaurant. You’ve calculated that each hamburger will cost $2.90 to make (including ingredients and labor). You believe you can sell 50,000 hamburgers each year. Priced at $6 each, you want to calculate your margin percentage.

To calculate the profit margin percentage, enter the following values:

• Cost: $2.90
• Revenue (Sale Price): $6

Once you hit the Calculate button, you’ll see the price was marked up by 106.9%. Your expected gross margin will be 51.67%. You can then use this information to see your profit margins compared to other industry businesses.

Key Benefits and Helpful Tips

Learning to price your products and services correctly can significantly impact your business's profitability. Here are some key benefits and tips to make the most of margin and markup calculations.

Key Benefits:

• No Memorizing Formulas - With our margin calculator, you won’t have to worry about remembering the difference between margin and markup. The calculator does the work for you and presents the results for both options.
• Comparing Products - Some companies sell multiple products or services. By comparing the profit margin percentages of your entire product line, you can determine which products generate the most profit. It is a better strategy to discontinue producing low-margin goods and focus more efforts on selling high-margin goods.

Helpful Tips:

• Stick to One Methodology - Confusing markup and margin can cause accounting and sales errors within your organization. It’s best to ensure the whole team is on the same page by sticking to one methodology.
• Include Operating Costs - Unfortunately, other costs associated with running the business (payroll, office supplies, leasing office space, and taxes) are not usually included in the margin calculation. While a positive profit margin is a good thing, it does not guarantee that the business will be profitable. If you can, include the operating costs in the margin calculation for a more accurate result.