Mark-up or Margin?
Two measures exist to gauge profitability - margin and markup. Businesses often mistakenly use these interchangeably.
Margin
The difference between sales and costs is called gross margin or profit margin. Gross margin is then divided by sales or selling price. This percentage is what is referred to as margin. In the example below, the gross margin of the item is $4 and we are selling it for $8 or a 50% margin ($4/$8).
Mark-up
Mark-up takes the same difference between selling price and cost (gross margin), but now it is divided by cost. In the example below, we still have a gross margin of $4 but now we are dividing by the cost. This tells us that we have a 100% mark-up.
The business owner who confuses these two terms will do the following: Suppose from his Road Map Analysis , he decides he needs a 40% margin when he sells a product. If the cost is $1, he will multiply that by .4 and get $.40 for a total selling price of $1.40. Then, he is confused when his accountant tells him that his margin for the quarter is much lower than 40%. He used mark-up to calculate his new price and that price only gives him a 28.6% margin explaining why it is much lower than he expected.
If he wants a 40% margin, he should be selling the product for $1.66. Rather than putting the formula here, an easier way to find this information is to use the table below. In the Margin % column he finds 40%, moving to the right, the cost multiplier is 1.66. So he simply multiplies his cost ($1) by 1.66 and gets the correct selling price - $1.66.
To read more about mark-up and the importance of gross margin, read this article from Inc.com or to see other calculation examples checkout this article from AllBusiness.com.
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