Markups and Margins

Be honest - if I asked you what the resulting margin would be on a 50% markup, how quickly could you answer?

Given how fundamental margins and markups are to any product business, I think it's time we cleared this up once and for all. If you can't be bothered to read this, just grab the "cheat sheet" at the bottom of the article, print it out and keep it in a safe place.

Markup

Markup is how much you add to the cost price of a product in order to arrive at the selling price. It can be expressed in absolute terms (e.g a £1.50 markup) or more usefully, in relative terms (e.g a 15% markup).

Here are some key points:

• a relative markup always leads to the same margin (see below)

• an absolute markup leads to a variable margin depending on the cost price of the item (i.e. it's not the same to add £1 to a product that costs 50p than to a product that costs £100)

Obvious points, but sometimes overlooked.

Formula

(Absolute Markup / Cost Price) * 100 = Relative Markup as a %

In human words: divide the absolute markup (the amount of profit, or absolute margin) by the original cost and multiply by 100.

Margin

Margin is how much profit you make on a sale. Again, it can expressed in absolute terms (e.g. a £10 margin) or more often, in relative terms (e.g. a 20% margin).

The point I made above bears repeating: a relative markup implies a consistent relative margin. What does that even mean in practical terms? Basically, if you always markup your products by the same relative amount (let's say 100%, which is double), the relative margin will always be consistent (in this case 50%, which is half). In yet more words: if you sell your products at double the cost price, half will be profit. Seems glaringly obvious when the numbers are simplified.

When the numbers aren't nice and round, you need to know how to convert back and forward to be able to answer questions like "If I apply a 23% markup, what will be the resultant profit margin?".

Formula

(Relative Markup as a % / (Relative Markup as a % + 100)) * 100

It looks ugly, but its simple. Here's the first case I mentioned as a worked example:

(100 / (100 + 100)) * 100 = (100 / 200) * 100 = 0.5 * 100 = 50%

And here's the answer to the question I asked about the 23% markup:

(23 / (23 + 100)) * 100 = (23 / 123) * 100 = 0.187 * 100 = 18.7%

So, as we already knew, 100% markup is a 50% margin. It might not have been so obvious that a 23% markup is a 18.7% margin.

Cheatsheet

Here's a quick reference for common markups in the range 10% to 100%. If you just need a rough idea of what markup gives what margin, use it as a reference.