Difference Between Margin and Markup

Margin vs Markup

Margin and markup are words that do not bother common people, but they are extremely important for those who are in a retail business. Markup and margin are related concepts as both are frequently used while pricing goods for selling. If the establishment has a fixed percentage set for profit, there margin or the markup is going to be same all the time. Those who are outsider to a business can know a lot about the profit parentage of an establishment by knowing either of the two figures of margin or markup. If one knows markup, it is easy to calculate margin, and vice versa. Let us see the difference between margin and markup.

Both markup and margin are dependent on what a shopkeeper feels is the fair price of an item, or what price can the market bear easily. Once a shopkeeper realizes what his shop and staff are worth, he knows the margin of profit that he can get from the customers. If you want a total piece of mind, and do not want to face other factors like VAT and other necessary expenses, you have to do some math and find out what the real margin of profit should be on products in your shop. This margin does not reflect your net profit as you have to make for other expenses before you can come down to net profit.

Markup or margin, both convey the same thing, and that is the percentage of profit a shopkeeper is charging his customers. In fact, they are two different ways of looking at the same thing. Markup is the percentage of cost price that is added to the cost price to come up with a MRP that includes your profit. For example, if you have decided on a profit of 50% and the cost price of an item is $10, you get the MRP as $10+ $5= $15 as your markup is 50%. But if someone has 50% margin, it means that half of selling price is the profit of the shopkeeper. Now the shopkeeper is getting a profit of $5 from every sale of $15, which gives him a margin of 33.33%. If everything goes as planned, the shopkeeper, when he has sold all the stock, can keep one third of the sale, and keep the remaining sale for the wholesaler or the source from where he arranged his stock. Someone who has just started up as a shopkeeper may be tempted to keep half of the sale thinking he is entitled to half amount as he kept markup 50% from the cost price will ultimately eat up his capital. Thus, it is very important to realize that margin is always lower than markup. In some cultures, this margin is also referred to as mark down to differentiate it from mark up. Mark down is always lower than markup.