Markup and margin are not the same
Both measure the profit on a sale, but against different things. Markup is the profit as a share of the cost; margin is the profit as a share of the price. Buy something for 4.00 and sell it for 6.00: the profit is 2.00, a markup of 50% (2 of 4) and a margin of 33.3% (2 of 6).
Mixing them up is a common way to charge too little: adding 30% to a cost gives a margin of only 23%. The same markup always gives the same margin:
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 75% | 42.9% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
| 300% | 75% |
The formulas
Markup % = (price − cost) ÷ cost × 100
Margin % = (price − cost) ÷ price × 100
Price from a markup = cost × (1 + markup % ÷ 100)
Price from a margin = cost ÷ (1 − margin % ÷ 100)
Margin % = markup % ÷ (100 + markup %) × 100
When your costs go up
Say a drink costs you 2.00 to make and sells for 5.00, a 60% margin. Your supplier raises prices and it now costs 2.20, 10% more. Keep the price and your margin falls to 56%.
To keep the 60% margin, the price has to rise by the same 10%: 2.20 ÷ (1 − 0.60) = 5.50. To keep only the same 3.00 profit per drink, 5.20 is enough, but then your margin is 57.7%, and it shrinks a little more with every increase. Raising prices a little and often is easier on customers than one big jump.
Prices before tax
Use costs and prices without tax (VAT, GST or sales tax). If your menu prices include tax, take it out first: a price of 5.50 with 10% tax in it is 5.50 ÷ 1.10 = 5.00 before tax.
Questions
What is the difference between markup and margin?
Markup is profit divided by cost; margin is profit divided by the selling price. Something that costs 4.00 and sells for 6.00 has a 50% markup and a 33.3% margin. The margin is always the smaller of the two.
Can a margin be more than 100%?
No. A margin is a share of the price, so it can only reach 100% if the cost is zero. A markup has no limit: selling for three times the cost is a 200% markup, and a 66.7% margin.
How do I turn a markup into a margin?
Divide the markup by 100 plus the markup: a 50% markup is 50 ÷ 150 = 33.3% margin. The other way, divide the margin by 100 minus the margin: a 25% margin is 25 ÷ 75 = 33.3% markup.
How much should I raise prices when costs go up?
To keep the same margin, raise the price by the same percentage as the cost. To keep the same profit per sale, add the same amount the cost went up by, which costs you a little margin. The second half of the calculator works out both.
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