Markup vs. Profit Margin – DealerVu Help Center

Markup vs. Profit Margin

Markup vs. Profit Margin

Markup: the difference between the cost of a good or service and its selling price. A markup is added onto the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.

Fixed markup:

Here is an example: Sale price is $2500, Product cost is $2000:

Markup = Sale price − Cost
$500 = $2500 − $2000

Percentage markup:

Below shows markup as a percentage of the cost added to the cost to create a new total (ie. cost plus):

Cost x (1 + Markup) = Sale price

or solved for Markup = (Sale price / Cost) − 1
or solved for Markup = (Sale price − Cost) / Cost

For example, the sale price is $1.99 and the cost is $1.40

Markup = ($1.99 / 1.40) − 1 = 42%
or Markup = ($1.99 − $1.40) / $1.40 = 42%

Profit margin is calculated with selling price (or revenue) taken as base times 100. It's the percentage of selling price that turned into profit, where as "Profit Percentage" or "Markup" is the percentage of cost price that one gets as profit on top of cost price. While selling something, one should know what percentage of profit he will get on a particular investment so companies calculate profit percentage to check what is ratio of profit on the basis of cost.

Profit percentage:

On the other hand, profit percentage is calculated with cost price taken as base:

Suppose you buy something for $100 and sell it off for $150:

Cost price = $100
Selling price (revenue) = $150
Profit = $150 - $100 = $50
Profit percentage = $50/$100 = 50% (profit as percentage of cost price)
Profit margin = $50/$150 = 33.33% (profit as percentage of selling price or revenue)