Margin and markup are often confused, but they measure profitability in different ways. Understanding the distinction helps you price products correctly and evaluate performance more accurately. This article explains the difference and when to use each.
Table of Contents
The Difference Between Margin and Markup
Markup and Margin are both measures of profitability, but they are calculated differently.
Markup is the amount added to a product’s cost to determine its selling price, expressed as a percentage of cost. For example, if an item costs $80 and is sold for $100, the $20 increase represents a 25% Markup.
Margin, or Cost-Plus Pricing, is the percentage of the selling price that represents profit. Using the same example, the $20 profit on a $100 sale equals a 20% margin. In short, markup is based on cost, while margin is based on sales price.
Determining Which is Preferable
While Markup is often used by operations or sales teams to set prices, it can give an inflated view of profitability. Because Markup is always mathematically higher than Margin, relying on it alone may lead you to believe a transaction is more profitable than it actually is. Calculating prices in terms of gross Margin provides a more accurate picture, since Margin can be directly compared to the financial statement. This makes it easier to assess the overall health of your sales. In CoreBridge, margin can be reviewed through Sales reports in the Reports module using drill-down reporting. These reports allow you to quickly identify which products are performing well and which may need attention.
Using Margin in CoreBridge
The CoreBridge Management System uses Margin in calculating all of its cost-plus pricing. Each Modifier, Part or Part Group has its own Margin table that you can manipulate through the Management Module. For more information on the differences between cost-plus pricing and market-based pricing, please see Market Based vs Cost Plus Pricing.
How to Determine Margin
There are more factors that affect selling price than merely the cost of a product. Following is a short list of factors to consider:
- What will my market bear?
- What is the customer is willing to pay?
- How fast does the customer need the product?
The key is to find the price that optimizes profits while maintaining a competitive advantage. CoreBridge makes this very easy to do. Not only can you define default minimum and maximum Margins, but you can easily raise or lower Margins as needed on specific Parts and Modifiers in your system. Any changes you make will instantly affect future pricing and have an immediate impact on your profitability.
Margin Formula
Gross Margin (%) = (Revenue – Cost of goods sold) / Revenue
Margin vs Markup Chart
The below chart is meant to help give a visual illustration of the difference between margin and markup.
