What is the difference between margin and markup?
Is there a difference between Margin and Markup? Absolutely!
These two terms are sometimes used interchangeably and can lead to a great misunderstanding of what is actually happening inside a business. This can wreak havoc on the bottom line if the differences are not understood. The math to calculate margin and markup are different and if confused can have you thinking you are more profitable than you really are. Many mistakenly believe that if a product or service is marked up 25%, the result will be a 25% gross margin on the income statement. However, a 25% markup rate produces a gross margin percentage of only 20%. As you can see, having a clear understanding and application of margin versus markup within a pricing model can have a drastic impact on the overall profitability of your business.
Which is Preferable?
Though markup is often used by operations or sales departments to help set prices, it often overstates the profitability of the transaction. Mathematically, markup is always going to be a larger number when compared to margin. Consequently, many individuals think they are obtaining a larger profit than is often the case if they look at markup alone. By calculating sales prices in gross margin terms you can directly compare the profitability of any transaction to the economics of the financial statement, allowing you to quickly and easily assess the health of your sales. Margin makes it easy to compare cost to revenue and can be reported on in CoreBridge though our Sales reports in the Reports Module using the drill down reports. Utilizing these reports you can quickly determine which products you are doing well on and which products you aren’t.
CoreBridge and Margin
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 review the following support article: What are the different Pricing Methods and Terms Used?
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.
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.