Many people have a problem with jargon and often get confused between the terms “margin” and “markup” which are often used interchangeably.
Let’s explain in simple terms.
Say you bought an item for $.50 and could sell it for $1.00, doubling your money.
In this case your markup would be (the difference between selling price and cost) divided by the cost of the item and multiplied by 100 to bring it to a percentage.
Example: ($1.00 – $.50) = $.50(difference). $.50(difference) /$.50(cost) = 1 x 100 = 100% (here “/” stands for divide)
Your markup was then 100%.
When you look at the margin on that sale, that would be (difference between selling price and cost) divided by the selling price and multiplied by 100 to bring it to a percentage.
As you can see in the examples given above, the only difference in the equations are in red (dividing by the cost or by the selling price).
“Profit” is the difference between what you sell it for and what you paid for it. “Margin” simple means you turn that into a percentage of the selling price. You do this so you can compare different items easily.
So the difference is that markup is your profit as a percentage of the cost and profit margin is your profit as a percentage of your selling price.
When you are deciding how much you want to make on the item and determining the price in which the goods should be sold, you would use markup. You would know it costs you $.50 and if you want to double your money you would use a markup of 100%. Of course, you could just double the $.50 as well and get to the same price.
