Margin and mark-up explained, with a worked example

Both start from the same profit on a sale: selling price less cost. They divide it by different figures.

Cost

What the business paid for the item.

Selling price

What the business sells it for.

Profit

Selling price less cost.

Mark-up

Profit as a percentage of cost: profit divided by cost, multiplied by 100.

Margin

Profit as a percentage of the selling price: profit divided by selling price, multiplied by 100.

The profit in pounds is the same either way. Only what it is measured against changes.

Cost is smaller than the selling price, so the same profit is a bigger share of cost. That is why the mark-up is always higher than the margin on a sale at a profit.

All the prices in this guide are before VAT.

With a mark-up, start from cost and go up. With a margin, start from the selling price and come down.

Take a margin of 25 per cent. The cost is the other 75 per cent of the price. So the price is the cost divided by 0.75.

A margin is always a percentage of sales, even when the figure you are given is cost. Read the wording with care before choosing the base.

To find the two percentages on a sale:

1. Take the cost from the selling price, both before VAT. That is the profit.
2. Divide the profit by the cost and multiply by 100. That is the mark-up.
3. Divide the profit by the selling price and multiply by 100. That is the margin.

To set a price from a cost:

1. Decide which of the two the target is. A target mark-up and a target margin of the same percentage give different prices.
2. For a mark-up, work out the percentage of the cost and add it to the cost.
3. For a margin, take the margin from 100 to find the share of the price that is cost. Divide the cost by that share, as a decimal.
4. Check the price by working the percentage back from it.

Tallow Yard Lighting sells lamps. A desk lamp costs the shop £32.00 and sells for £50.00. The profit is £18.00.

The same £18.00 is a mark-up of 56.25 per cent and a margin of 36 per cent.

Now the shop prices a lampshade that costs £21.00. For a mark-up of 25 per cent, the profit is 25 per cent of £21.00, which is £5.25. The price is £26.25.

For a margin of 25 per cent, the cost is 75 per cent of the price. £21.00 divided by 0.75 is £28.00. The profit is £7.00, and that is 25 per cent of £28.00.

The two prices differ by £1.75 on one lampshade.

The same two percentages work on a year of trading. Cost becomes cost of sales, selling price becomes sales, and profit becomes gross profit.

Gross profit margin is gross profit divided by sales, multiplied by 100. It shows what is left of each pound of sales after the cost of the goods. Net profit margin is the same sum with net profit in place of gross profit.

A trader's pricing can also fill a gap when records are missing. Suppose Tallow Yard adds a mark-up of 56.25 per cent to everything, and the goods it sold in the year cost £48,000.00.

Gross profit is 56.25 per cent of £48,000.00, which is £27,000.00. Sales are £48,000.00 plus £27,000.00: £75,000.00. The gross profit margin is £27,000.00 divided by £75,000.00, times 100: 36 per cent, the same as on the one lamp.

• Wanting a margin, but adding that percentage to cost. Adding 25 per cent to the lampshade's cost gives £26.25, and a margin of only 20 per cent.
• Dividing by the wrong base. Mark-up divides by cost. Margin divides by the selling price.
• Taking the margin percentage of the cost to find the profit. A margin is a percentage of the selling price, so work back from the price.
• Mixing a price that includes VAT with a cost that does not. Use both figures before VAT.
• Comparing one business's mark-up with another's margin. They are different measures of the same profit.

• Cost plus profit equals the selling price.
• On a sale at a profit, the mark-up is the bigger percentage. If the margin came out bigger, the two bases have been swapped.
• The mark-up percentage of the cost and the margin percentage of the selling price give the same profit in pounds.
• A price set for a margin passes the test when worked back: profit divided by that price, times 100, is the margin wanted.

For the desk lamp: 56.25 per cent of £32.00 is £18.00, and 36 per cent of £50.00 is £18.00. Both are the profit.