The difference between the margin and the mark-up is extremely important for everyone involved in trade. Often the two terms are confused with each other and used incorrectly. The main difference results from the methods of calculating the margin and the mark-up.
The margin is a percentage of the final selling price that is left over to us in the form of an after-sale profit. For example, if we sell goods with a margin of 50%, this means that when selling for PLN 100, PLN 50 will be our profit after deducting the cost of the goods.
Can the margin be greater than 100%?
Often people confuse the mark-up with a mark-up claiming that they are selling something with a 300% mark-up. It is logical that the margin cannot physically exceed 100%. Because in the case of a 100% margin, 100% of the sales amount would remain for us, i.e. the goods would not cost us anything. Claiming that the margin is over 100% would mean that someone pays us extra for the goods.
Consider a simple example. We are a shop selling photocopying paper. We buy it from the manufacturer for, for example, PLN 10. It is our cost of the commodity, in order to earn it we need to sell it for a greater amount. For example, if we want to earn twice as much, we have to sell our paper for PLN 20. What is the margin? Since from each PLN 20 we have PLN 10 of profit (after deducting the cost of purchasing paper from the manufacturer), our margin is 50% (10/20 = 0.5 = 50%).
How to calculate the final price knowing the purchase price and target margin?
If we want to calculate the final price of a given product, when we know the margin at which we want to sell it and we already know the purchase price, we can use the following formula:
Selling price with a given margin = Purchase price / (1 – margin percent).
For a margin of 40%, it will look like this:
Sale price = Purchase price / (1 – 40%)
What after removing the percent sign will look like this:
Selling price = Purchase price / (1 – 0.4).
The markup is calculated a bit differently, namely, it is a percentage of the purchase amount of a given product that we add to its sale. In this case, in fact, the mark-up can easily exceed 100% and the mark-up is often confused with the margin. Let’s go back to our example with paper. We buy paper from the manufacturer for PLN 10, if we want to earn twice as much, we sell it for PLN 20, which is 100% more than we bought – and this 100% is the mark-up. But the margin will be “only 50%” and never exceed 100%.
The formula for calculating the percentage surcharge
Consider another example to show the difference between the mark-up and the mark-up on a specific example. We sell our paper for PLN 100 – that is our mark-up is 900%, because we sell it for an additional 900% of the purchase price (PLN 10 + 900% * PLN 10). But how much will the margin be? For each transaction of PLN 100, we earn PLN 90, i.e. 90/100 = 90%.
How is the percentage based on the purchase price and selling price calculated? Below we present the ready pattern:
Markup = ((Sales price – purchase price) / purchase price) * 100%
When we substitute the data presented in the example above:
Sale price – PLN 100.
Purchase price – PLN 10
Percentage overhead = ((100 – 10) / 10) * 100% = 900%.