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One of the biggest decisions of your business is determining the right price for your product. The pricing
has to be competitive and at the same time, high enough to turn a reasonable profit. Achieving the right
balance between these two can be really hard. Calculating your markup and margin are highly essential in
such cases where the two numbers are used to estimate the sale price and cost of the goods. While these
two seem similar, there are some important differences between the two.
Markup is the amount that you charge above the cost of goods.
Margin is the difference between the cost of goods and the sales price.
Even if the distinction is subtle, it is rather important, particularly where formulas are necessary to make
crucial business decisions.
Calculating Markup vs. Margin can be challenging, but the formulas are relatively simple. It means you
can apply these to your pricing strategy once you know how to use them.
HERE IS A SIMPLE EXAMPLE:
The cost price of a product is $800, and the sale price is $1,000. Now to calculate the margin, you have to
subtract the cost price of $800 from the selling price of $1,000. Thereafter, to evaluate the markup, simply
divide the $200 margin by the cost of the product, which is $800. The result is 25%.
It is easy to mistake one for the other but ideally, both of these produce different results.
WHICH TO USE WHERE?
Markup is used when you determine the price of a product, while margin helps you understand how much
to make on each of your purchases. This way, even after all the other expenses have been considered,
you will remain profitable. The annual performance can also be calculated using margins, thus allowing
you to visualise the various costs associated with the sourcing and selling of the product.
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One of the integral parts of developing an effective pricing strategy is performance measurement and a
THE DIFFERENCE BETWEEN MARKUP AND MARGIN
April 21, 2021
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