Margin Versus Markup

Categories: Billing & Invoicing, Business Management, Free Materials | Posted: March 26, 2010 | 5 Comments »

Markup Versus Gross Profit Margin

We’re glad you took an interest in this topic on margin and markup. This topic explains the difference in gross profit margin (or profit margin) and price markup.

There is a big difference between markup and gross profit. In fact, this is one of the most common errors contractors make and it can cost you big.

Markup and margin, what’s the difference?

Short Answer

Markup is a percentage of the cost.
Margin is the same dollar amount expressed as a percentage of the selling price.

Example
Item costs $1.00 Items sells for $1.50.
Markup is .50 or 50 percent of the cost.
Margin is .50 or 33 a percent of the selling price.

A More Detailed Explanation

Markup Defined

Markup is the difference between invoice cost and selling price. It may be expressed either as a percentage of the selling price or the cost price and is supposed to cover all the costs of doing business plus a profit. Whether markup is based on the selling price or the cost price, the base is always equal to 100 percent. Markup is the additional amount added to a sales proposal (bid) or price and which contain overhead, profit, excess costs, etc.

Margin Defined

The difference between net sales and the cost of goods sold. It is also referred to as gross profit. Gross Profit/Total Sales. The percentage of every dollar earned that can be used to pay general and administrative expenses.

Margin Versus Markup Formula

Applying a simple formula will determine how much the margin will be based on a percentage that the contractor expects to make. The contractor will set a margin that ensures that they will be competitive in the local market. It may or may not reflect the actual value of an item. In your example, we are looking to make an 60% margin assuming that our item costs $10. To figure out our sales price we use the following formula, expressing the margin as a decimal (i.e., 60% = .60):

Retail Price = (Cost of item)/(1, desired margin)

Markup Versus Margin Table

Markup % Gross Profit Margin % Multiplier %
20 16.67% 120
21 17.36% 121
22 18.03% 122
23 18.70% 123
24 19.35% 124
25 20.00% 125
26 20.63% 126
27 21.26% 127
28 21.88% 128
29 22.48% 129
30 23.08% 130
31 23.66% 131
32 24.24% 132
33 24.81% 133
34 25.37% 134
35 25.93% 135
36 26.47% 136
37 27.01% 137
38 27.54% 138
39 28.06% 139
40 28.57% 140
41 29.08% 141
42 29.58% 142
43 30.07% 143
44 30.56% 144
45 31.03% 145
46 31.51% 146
47 31.97% 147
48 32.43% 148
49 32.89% 149
50 33.33% 150
51 33.77% 151
52 34.21% 152
53 34.64% 153
54 35.06% 154
55 35.48% 155
56 35.90% 156
57 36.31% 157
58 36.71% 158
59 37.11% 159
60 37.50% 160
61 37.89% 161
62 38.27% 162
63 38.65% 163
64 39.02% 164
65 39.39% 165
66 39.76% 166
67 40.12% 167
68 40.48% 168
69 40.83% 169
70 41.18% 170
71 41.52% 171
72 41.86% 172
73 42.20% 173
74 42.53% 174
75 42.86% 175

So if you mark up a $100 part by 25%, you will be selling it for $125 with a gross profit margin of 20% and a gross profit of $25. This is where many contractors make their mistake. They are told their overhead is 25% so they mark up equipment and items by 25%. That results is a 20% gross profit margin and creates a net loss of 5%.

Please also see: How to Calculate Gross Profit Margin, How to Calculate the Selling Price of an Item, and HVAC Dictionary of Accounting Terms and Definitions

 

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5 Responses to “Margin Versus Markup”

  1. Peter Stastny Says:

    Thanks for the great, simple explaination and table.

  2. Brian Bodemann Says:

    Question: I repair cars and sell parts to my customers. For years we have marked up parts 30%. Should we sell our parts utilizing the margin formula?

  3. JamesLeichter Says:

    Not necessarily. If you are charging enough for labor it may be that your parts markup is correct. The most important thing is your overall gross profit margin.

  4. Nasiphi Dutywa Says:

    What a great find! This was explaned to me and I di not understand a thing until I read up on your website. You have been of so much help to me! I have an assignment I have to complete at work and was afraid of saying I did not understand this paert of the task. Thanks again.

  5. Mr. HVAC » Blog Archive » How to Calculate the Selling Price of an Item Says:

    [...] and item 25% (item price times 1.25), your gross profit margin would only be 20%. Please also see: Gross Profit Margin versus Markup and Calculating Gross Profit [...]

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