Understanding the difference between markup and margin is crucial for business owners, warehouse managers, and e-commerce retailers aiming to maximise profits. 

The issue is that the terms are often used interchangeably, leading to pricing mistakes that can harm your bottom line. Mixing them up might result in underpriced products that erode profits or overpriced items that drive customers away. 

Our guide eliminates this confusion, helping you set a pricing strategy and calculate profit margin smartly and effectively. We provide clear step-by-step guidance on how to calculate and convert markup to margin. We also present real-world scenarios, common pitfalls, advanced pricing, and the benefits of analytics and automation in optimising profits.

Here's what you can look forward to:

• What Are Markup and Margin? (With Real-World Examples)
• Why the Difference Matters: The Business Impact
• Key Pricing Terms: Quick Reference Glossary
• Markup vs Margin: What’s the Difference?
• How to Calculate Markup and Margin
• How to Convert Markup to Margin (and Vice Versa)
• Step-by-Step Conversion Guide
• Markup and Margin in Real-World Scenarios
• Common Pitfalls and How to Avoid Them
• Advanced Pricing Strategies: Beyond the Basics
• How StoreFeeder Can Help

What Are Markup and Margin? (With Real-World Examples)

Markup is the amount you add to a product's cost to determine its selling price. It’s expressed as a percentage of the cost price.

Here’s an example. A retailer buys vacuum cleaners for £100 and sells them for £125. Their markup is 25% (25 ÷ 100) of the cost. Stated differently, the markup percentage calculation is cost X markup percentage, which in this case is £100 × 0.25 = £25.

Businesses use markup to cover their initial cost and ensure a profit.

Margin (gross profit margin) is the percentage of your selling price that you earn as profit.

Example: The retailer buying for £100 and selling for £125 has a gross profit of £25. The margin, being the profit percentage of sales, is 20% (25 ÷ 125).

Markup and margin influence pricing strategies, profitability analysis, and financial reporting, making them crucial measures for assessing your company's financial well-being.

Different businesses and roles may prioritise these metrics differently:

• Buyers often prioritise markup when negotiating prices with suppliers to cover costs and achieve a profit when selling.
• Sales teams/retailers use markup to price products. For instance, during a promotion, a retailer might apply a standard markup to quickly determine a discounted price. However, they need to understand their margin to prevent discounts from eating into profit.
• Finance teams and business owners focus closely on margin. It is a direct reflection of the percentage of revenue available to cover operating expenses. Think of it as the top-line profit that contributes to the bottom line.

Why the Difference Matters: The Business Impact

Confusing markup and margin can have severe business consequences. Negative impacts include:

• Underpriced products and eroded profits: If your goal is a 25% profit margin (meaning 25p profit for every £1 in sales), and you price using a 25% markup (meaning 25p profit for every £1 of cost), your actual profit will be lower than you planned.
• Overpriced products and lost competitiveness: If your cost price is £100 and you target a 25% markup, your selling price should be £125. If you mistakenly apply a 25% margin, you’d calculate a sales price of £133.33. The higher price could make your products uncompetitive.
• Missed profit opportunities: When your pricing is distorted by using the wrong term, you make incorrect assumptions and ill-informed decisions. You might miss promotional opportunities or underprice popular products or services.

Key Pricing Terms: Quick Reference Glossary

For quick reference, here's a glossary of the pricing and financial terms we discuss.

Markup vs Margin: What’s the Difference?

The core difference between the two is their base of calculation and how they express profit percentage.

• Markup is based on cost: "What percentage of the cost do I add to get my selling price?"
• Margin is based on selling price: "What percentage of the selling price is actually profit?"

Your markup percentage will always be higher than your margin percentage (unless your profit is zero or negative).

Check out this handy side-by-side comparison of the key distinctions. It includes an example to demonstrate how markup is higher.

How to Calculate Markup and Margin

Let's run through the formulas with an example.

Markup Formula:

• Markup (%) = (Selling Price − Cost)/Cost ​× 100

Margin Formula:

• Margin (%) = (Selling Price − Cost​)/Selling Price × 100

Example: Imagine a wholesaler selling bar fridges.

• Unit Cost Price (purchase price + other landed costs like shipping + transport): £80.00
• Selling Price (the price charged to the retailer): £100.00

Step 1. Calculate Gross Profit:

This is a logical first step, as both formulas use GP.

Gross Profit = Selling Price - Cost Price. GP = £100.00 - £80.00 = £20.00

Step 2. Calculate Markup:

Markup (%) = (Gross Profit / Cost) × 100 = (20.00 / 80.00) × 100 = 0.25 × 100 = 25%

Step 3. Calculate Margin:

Margin (%) = (Gross Profit / Selling Price) × 100 = (20.00 / 100.00) × 100 = 0.20 × 100 = 20%

How to Convert Markup to Margin (and Vice Versa)

Assume you've established a markup of 25%. Unless you understand the equivalent margin, you only have half the picture. Luckily, there are formulas to convert one to the other.

Let's break down these calculations.

Converting Markup to Margin:

• Given: Markup = 25%
• Markup to Margin Formula: Margin (%) = Markup (%) / [100 + Markup (%)] × 100
• Input the numbers: 25 / (100 + 25) × 100 = 25 / 125 × 100
• = 0.2 × 100
• Margin = 20%

Converting Margin to Markup:

• Given: Margin = 20%
• Margin to Markup Formula: Markup (%) = Margin (%) / [1 - Margin (%)] × 100
• Input the numbers: 0.20 / (1 - 0.20) × 100 = 0.20 / 0.80 × 100
•  = 0.25 × 100
• Markup = 25%

Step-by-Step Calculation Guide

Let's say you've received a shipment of a new product line, like ergonomic chairs.

Gather all relevant cost and selling price information.

• Cost Price (landed cost): £120.00
• Target Selling Price: £180.00

Step 1. Calculate Markup and Margin

Gross Profit: £180.00 − £120.00 = £60.00

Markup calculation: (60.00 / 120.00) × 100 = 50%

Margin calculation: (60.00 / 180.00) × 100 = 33.33%

Step 2: Converting Markup to Margin

Using a 50% markup, confirm the equivalent margin: (50 / (100 + 50)) × 100 = 33.33%. This matches our direct calculation.

Step 3: Converting Margin to Markup

With a target margin of 33.33%, calculate the required markup: (33.33 / (1−0.33)) × 100 = around 50%. This confirms consistency across both methods.

Markup and Margin in Real-World Scenarios

To illustrate how markup and margin work in practice, here are four clear examples that show their application across different business contexts.

1. Retail example: Setting a price using markup, then checking margin.

A coffee supply company purchases a new coffee maker for £40 each. They decide on a 75% markup to cover overheads and make a tidy profit on this popular high-end item.

• Their markup = £40 x 0.75 = £30
• Selling price = £40 + £30 = £70

Now, they check their margin for financial reporting and to assess profitability.

• Margin (%) = Markup (%) / [100 + Markup (%)] × 100
• Margin = 75 / (100 + 75) × 100 = 75 / 175 × 100
• = 0.4286 × 100
• Margin = 42.86%

Doing these calculations ensures they price consistently while monitoring their true profit percentage on sales.

2. eCommerce example: Adjusting prices to achieve a target margin

An online gadget store has a strategic goal of a 30% gross profit margin on all its electronics. They buy a new smart speaker for £65.

To set the price, they need to convert their target margin to markup.

• Convert 30% gross margin to decimal = 0.30
• Markup = 30% / (1 - 0.3) = 30 / 70 = 0.4286
• Markup % = 42.86%
  Now, apply this markup to the cost:
• Markup amount = £65 x 0.4286 = £27.86
• The Selling Price = £65 + £27.86 = £92.86

This ensures their speaker's price meets their sales revenue and profitability targets. 

3. Service Business example: Quoting based on desired margin

An IT service provider must quote for a cybersecurity upgrade. They know their direct costs for a contractor and software amount to £350.

This service business aims to achieve a consistent 30% margin on projects to cover overheads (rent, salaries, utilities, administration) and return an acceptable profit. 

The inverse of the gross margin formula is used to calculate the desired gross margin and determine the selling (quote) price.

• Selling Price = Cost / (1 - Margin)
• Convert 30% to decimal = 0.30
• Selling Price = £350 / (1 - 0.30)
•  = £350 / 0.70
•   Price = £500

By quoting £500, the company builds in the gross margin percentage they need.

4. Wholesale vs. Retail: How pricing strategies differ

• Wholesalers typically operate on lower margins but higher volumes. They might aim for a 10-20% margin to remain competitive.
• Retailers need higher markups (and thus higher gross margins) to cover their physical store costs, marketing, and staff wages. They might aim for a 50%-100%+ markup.

Industry-specific variables, type of business, product lines, and competition all factor into your margin and markup strategies. 

Accounting for VAT and other UK-specific costs

If you're a VAT-registered firm, you apply VAT to your selling price. Profit calculations for margin analysis are typically based on your ex-VAT selling price and your cost.

Also, ensure your "cost price" accounts for all landed costs. Over and above your supplier's invoice, include any shipping costs, import duties, and other direct costs incurred.

Common Pitfalls and How to Avoid Them

Be aware of the following pricing and profitability pitfalls to avoid costly errors:

1. Assuming markup and margin are interchangeable: Always specify "markup" or "margin" when discussing percentages. Educate your team on the difference. 
2. Setting prices using the wrong percentage: To avoid eroding your profit or making your products less competitive, clearly define your target margin for each product category. Then, use the margin to markup conversion formula to find the markup that provides your desired profit margin.
3. Failing to update pricing as costs change: Regularly review your pricing against changes in supplier or production costs. Linking your purchasing data directly to your pricing system is a smart way to manage this vital process.
4. Not aligning pricing strategy with market expectations or competitor benchmarks: Don't only consider your costs when pricing. Analyse the market to balance your gross margin percentage with competitor prices, customers' perceived value, and buying behaviours.
5. Not accounting for all costs: Be sure to include all costs in your calculations. There are a number of applicable expenses companies overlook, including:
   
   • Shipping and transport
   • Storage
   • Duties
   • Sales commissions
   • Channel commissions and fees
   • Payment processing fees
   • Discounts

Advanced Pricing Strategies: Beyond the Basics

Besides cost-plus pricing, there are several more nuanced and dynamic techniques you can consider.

• Dynamic pricing: Dynamic pricing adjusts the markup/margin in response to factors like demand, competitor pricing, seasonality, and inventory levels. The approach helps you to stay competitive, maximise revenue, and manage stock and inventory turnover. For example, you might run a discounted promotion to clear excess or outdated stock.
• Tiered and volume pricing: This approach differentiates pricing based on product category, order volume, or customer type (e.g., wholesale vs retail). Wholesale customers typically receive lower prices than retail customers. Offering bulk discounts to encourage larger orders is a popular moneyspinner.
• Psychological pricing: Psychology includes tactics like marking items at £9.99 instead of £10 to make them seem cheaper. Other examples are prestige pricing for luxury goods and bundle pricing for value-attractive packages.
• Integrating cost-plus vs. value-based pricing: Cost-plus lists prices by adding a margin to costs. Value-based pricing considers the product's perceived value to customers. A combined strategy starts with a cost-plus baseline, then adjusts based on value to the customer. What are customers willing to pay based on benefits and perceived value?

How StoreFeeder Can Help

StoreFeeder’s industry-leading platform has helped hundreds of organisations to automate and optimise pricing and profitability analysis.

Here's how we can help your business:

Dynamic pricing profiles for flexible formulas: Sophisticated pricing profiles allow you to create flexible, intelligent pricing formulas. Refine prices based on real-time data, and automate adjustments when costs or other variables change.

Automated updates across all channels: Automated price updates across all your marketplaces or e-commerce platforms guarantee you maintain your margins as supplier costs, stock levels, or market conditions shift.

Precise cost allocation and VAT integration: Automatically handle VAT, channel fees, and other costs for accurate pricing and margin calculations.

Bulk actions and multi-channel management: Manage pricing for multiple SKUs using bulk actions. Multi-channel integration enables you to update pricing rules across all your sales points easily. 

Real-time dashboards and analytics: StoreFeeder's live dashboards and powerful analytics help you monitor your gross margins, spot trends, and identify valuable opportunities.

To perfect your pricing strategy and calculate profit margin in real-time, explore StoreFeeder’s smart and trusted solutions.

FAQs

Why is it important to know both markup and margin?

Knowing both helps you determine competitive prices, understand your profitability, and avoid underpricing or overpricing. Margin is often used for financial reporting, while markup is used for pricing.

What tools can help with markup–margin conversions?

Useful tools for markup-margin conversions include:

• Excel or Google Sheets formulas
• Online margin/markup calculators
• POS or accounting software like QuickBooks

How do I calculate the selling price using cost and markup percentage?

Use the formula: cost x markup percentage = markup amount. Then add that to your cost.

Conclusion

Confusing markup and margin can undermine profits and lead to flawed pricing strategies. By mastering these calculations and reviewing prices regularly, you can set competitive prices and maintain healthy margins.

StoreFeeder’s automated pricing and margin management includes real-time adjustments and intelligent reporting. To learn how our tools can make a difference in your business, request a demo today.