Why do business owner use the term ‘mark-up’ a lot while sales executives use the term ‘sales margin’ instead? For the non-business savvy man in the street, these terms are used interchangeably without realizing they are referring to two different financial concepts.
The similar aspect of it: Gross profit (revenue less cost of sales) is taken into consideration when it comes to determining the mark-ups and margins.
Mark-up calculates profit as a percentage of direct costs. It is a straightforward way of pricing a product, as a premium is simply added to the direct costs.
The mark-up formula is defined as:
Mark-up percentage = (Gross profit/cost of sales) x 100%
Margin calculates profit as percentage of the sales price. Margin is like working backwords, it enables business to calculate how much profit is made from sales.
The margin formula is defined as:
Margin percentage = (Gross profit/sales price) x 100%
Example of these 2 often-mistaken financial concepts
You want to mark-up your product by 25%, that means for cost of sales of $ 1,000, your sales price is tagged at $ 1,250
For a sales price of $ 1,250, your margin is 250/1,250 = 20%