What is the difference between mark-up and margin?

A question about business concept, Gross margin profit(GMP) and Markup?

• For GMP, the formula is GMP=(Price-Cost)/Price; Markup=(Price-Cost)/Cost and the difference is denominator, but why people derive this very two similar concept? To me, Markup makes more sense because it means how much profit you make per one product.

• Answer:

  Good question. You are missing out on something, though. You have made the assumption that every product is equal. Unless you have a contract to be supplied widgets for $10 each for eternity, you will see that costs of goods to be sold fluctuate. This is where you get into the different inventory methods (LIFO, FIFO, weighted average, etc.) in accounting. If on a per-unit basis you apply markup, then you are looking at what this thing cost you (let's say $10). So yes, it does apply to profit from one product. What if you have, in your warehouse, 30 widgets that cost $10 27 widgets that cost $10.02 3 widgets that cost $25 18 widgets that cost $13.07 21 widgets that cost $7.44, AND each widget is identical. The only thing that differs is the amount you paid for them. You can choose to have a set price. A widget costs $15. When you sell one of the $25 widgets for $15, you have no markup. You have a LOSS. I wouldn't use the term markdown. The opposite of profit. Your gross margin profit percentage would not change, but your markup percentage would change. You could also say that I will markup all widgets 50% over what I paid for them, and the customers can deal with it. This isn't usually realistic (maybe for small shops, but not for businesses of greater size). In this case, markup would be constant, and gross margin profit would fluctuate. You cannot stay in business setting a price and dealing with market fluctuations, so you look at GMP to guide you in decision-making. i.e. Should we be considering increasing prices gradually? You should think about the long-run also. What do you do with overhead? It's easy to say that 1. I bought a widget for $10 from a supplier. 2. I sold the widget for $15 to a customer. 3. I made $5, so that's 50% profit. That happens from time to time, but EXTREMELY rarely. How do you factor in the cost of electricity, for example? Let's say you have a warehouse and a store. Each has to have utilities. You certainly can use weighted formulas to allocate overhead costs to products. For instance, I sell 100 widgets. The widget spends 20% of the time in the warehouse, and 80% of the time in the store. Your warehouse electricity bill this month is $100, and your store electricity bill this month is $75. Just by adding two electricity bills, your formula becomes much more complicated. We'll do it for the whole amount first. This is the cost for 100 widgets, which you bought from a supplier for $10 each. Cost of 100 widgets = 100($10) + .2($100) + .8($75) = 1000 + 20 + 60 = $1080. Now, if you want the per-unit amount, divide by 100 = $10.80 Sophisticated organizations use this. Now, imagine how detailed the calculation becomes when you add in employee wages, all the other utilities (water, gas, internet, security systems), repairs and maintenance to your warehouse and store, employee and customer theft, interest payments on loans.. etc. What if you also have a central office? Those people do not really even ever see the product. So, there you have accounting costs, more utilities, etc. etc. etc. I'm being very simple here. Gross margin is usually defined as Revenues minus Cost of Goods Sold. When you add in related expenses and overhead, you are really talking about Net Profit Margin. But I wanted to add this in there for you so you could see.