What's the difference between profit margin and markup?

Modified on Wed, 20 Jun 2018 at 09:01 AM

Profit margin and markup are two different accounting terms that are often confused and even used interchangeably. In some circumstances, profit margin and markup might be using the same inputs and analyzing the same transaction, yet they present different information.

Usually, profit margin in these contexts is referring to gross profit margin for a specific sale, which is the profit earned on a product expressed as a percentage of total revenue from that product. For instance, if a company spent $1,000 for a good and received $3,000 in revenue, then gross profit margin is equal to ($3,000 - $1,000) / ($3,000), or 66.6%.

Markup is the retail price a product that is expressed as a percentage of wholesale costs; for instance, using the same numbers as the example above, markup would be equal to ($3,000 - $1,000) / ($1,000), or 200%.

The two concepts are telling different sides of the same story. In this light, the profit margin is addressing the profit as it relates to selling price, whereas the markup addresses the profit as it relates to cost price.

However, gross profit margin begins to change significantly once you stop defining it as the margin for a specific sale and begin accounting for different kinds of costs, such as wages, advertising and overhead.

Since markup only determines how much money is being made on a specific item relative to its direct costs, whereas profit margin takes into consideration total revenues and total costs from various sources, the different accounting uses for each term become clear.

Source : Investopedia

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