Margin vs. Markup: What's the difference?
Many entrepreneurs mistake these two metrics, which can lead to underpricing products.
- Gross Margin is the percentage of total revenue that is profit.
Formula: (Price - Cost) / Price - Markup is the percentage added to the cost price to determine the selling price.
Formula: (Price - Cost) / Cost
Example
If you buy a widget for $50 and sell it for $100:
- Your Profit is $50.
- Your Margin is 50% ($50 profit is 50% of the $100 price).
- Your Markup is 100% ($50 profit is 100% of the $50 cost).