Optimize your pricing strategy. Calculate margin, markup, and profit to ensure healthy business growth.
One of the most common mistakes in business is confusing Profit Margin with Markup. While both metrics deal with profit, they represent different ratios and tell different stories about your pricing structure.
Margin is the percentage of revenue that is profit. It tells you how much of every dollar earned is actually yours.
Formula:(Price - Cost) / Price
Markup is the percentage added to the cost to get the selling price. It determines how much you mark up your goods.
Formula:(Price - Cost) / Cost
For example, if you buy a product for $100 and sell it for $150, your profit is $50. Your markup is 50%, but your margin is only 33.3%.
A "good" margin varies largely by industry. Grocery stores often run on thin margins (1-3%), while software companies can see margins up to 80-90%. Generally, a 10% net profit margin is considered average, 20% is good, and 30% is high.
Because margin is calculated based on the total selling price (which is always higher than cost), the percentage will always be lower than markup, which is based on the lower cost figure.
