Markup vs margin

Markup vs margin

Markup is a multiple of cost. Margin is a share of the selling price. The same price expressed both ways produces two different percentages, and treating one as the other is the most expensive arithmetic mistake in small food businesses.

The same price, both ways

Take a product costing 60 and selling for 100. The profit is 40.

• Markup: 40 divided by the cost of 60, which is 66.7%.
• Margin: 40 divided by the price of 100, which is 40%.

One price. Two correct numbers. They are only equal at zero.

The conversions

To hit a target margin, work back from price rather than up from cost:

price  = cost / (1 - margin)
markup = margin / (1 - margin)
margin = markup / (1 + markup)

A 40% margin therefore means multiplying cost by 1.667, not by 1.4.

What the confusion costs

Take that same cost of 60 and multiply by 1.4, calling it a 40% margin. The price is 84, the profit is 24, and the realised margin is 24 divided by 84, which is 28.6%. You intended 40 of profit and made 24, giving away 40% of it on every unit sold while believing the pricing was on target.

The error scales with the target. At a 50% intended margin, multiplying by 1.5 delivers 33.3%.