Know your margins and mark-ups

 

Mark-up is the amount an item is increased by to get the selling price and Margin is the difference between the cost of an item and the selling price

Mark-ups and Margins are commonly confused with each other. Using them incorrectly can lead to setting a price that is too low, resulting in lost profits or setting a price that is too high, resulting in lost sales.When we consider mark-ups and margins in money they’re the same, as they are both the profit made on an item. If an items sells at £75 and costs £50, a profit of £25 is made. The mark-up is £25 as this is the amount the item was increased by to get the selling price. The margin is also £25 because it’s the difference between the cost of an item and the selling price. It’s when markup and margin are calculated as percentages they differ because markup is based on costs and margin is based on selling price. Therefore, mathematically markup is always a larger than margin as the basis for the markup calculation is cost rather the than selling price. In this case, the mark-up is 50% and the margin is 33%.

 

Mark-up

 

Mark-up is the amount an item is increased by to achieve the selling price, usually expressed a percentage cost of the item.

 

If the cost of an item is 50 and the selling price is 75, the mark-up is 25, as it is the amount an item is increased by to get the selling price., i.e. the profit. The mark-up percentage is 50%, calculated as (Selling price 75 – costs 50) / cost 50 x by 100 = 50%.  This means that the cost of the item is marked up by 50% to achieve a markup of 25.

 

It is possible to calculate the markup percentage needed to achieve a required markup in money.  Using the prior example, lets say you want to achieve a markup of 35 (instead of 25) on the item costing 50 and you wanted to know what the mark up percentage would be.  The markup percentage is 70% calculated as desired markup in money 35 / costs 50 x by 100 = 70%. This means that to achieve a markup of 35 on an item costing 50, you would need to mark up the cost of the item by 70%.

 

If costs increase and you want to work out how much to increase the cost by to achieve the same markup percentage simply multiply the new cost by the markup percentage (Cost 55 x 70% markup = 38.50, then add this to the costs to derive the selling price (Cost 55+ markup 38.50 = Selling price 93.50)

 

Margin

 

Margin is the difference between the cost of an item and the selling price, usually expressed a percentage cost of the selling price.

 

If the cost of an item is 50 and the selling price is 75, the margin is 25, as it is the difference between the cost and the selling price, i.e. the profit. The margin percentage is 33%, calculated as (Selling price 75 – costs 50) / costs 50 x by 100 = 50%. This means that the margin is 33% of the selling price.