One of the most frequent arithmetic errors in commerce is confusing markup with profit margin. Setting a 30% markup does not provide a 30% profit margin, and misunderstanding this distinction can bankrupt an enterprise.
Markup vs. Profit Margin
- Markup: The percentage added to the cost of a good to establish selling price.
Markup = (Selling Price - Cost) / Cost. - Margin: The percentage of selling price that is retained as gross profit.
Margin = (Selling Price - Cost) / Selling Price.
Comparison Table
| Cost | Desired Markup | Selling Price | Resulting Profit Margin |
|---|---|---|---|
| $100 | 25% | $125 | 20.0% |
| $100 | 50% | $150 | 33.3% |
| $100 | 100% | $200 | 50.0% |
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Frequently Asked Questions
How to convert markup to margin?
Margin = Markup / (1 + Markup). For example, a 50% markup (0.50) is 0.50 / 1.50 = 33.33% margin.