Please clarify the difference in meaning behind markup and margin. Why would I use one or the other?

Markup = (Price - Cost)/Cost

useful for examining how much actual profit is made on each sale.

Margin = (Price - Cost)/Price

useful for helping ensure that a sale generates a profit.



Markup is how much the seller is adding to the cost to get the price of sale.

Margin is how much of the sale price is available for overhead and profit.

You would tend to use markup when you are more concerned with costs than the sale price. You would use margin when you are more concerned with the sale price than costs.

$$\frac{\text{markup}}{\text{margin}} = \frac{\frac{\text{Price}-\text{Cost}}{\text{Cost}}}{\frac{\text{Price}-\text{Cost}}{\text{Price}}} = \frac{\text{Price}}{\text{Cost}}$$

Since cost is generally less than price, markup will generally be larger than margin.

Profit (both accounting and economic) will be no more than margin. So if you want to talk about profit, you might start by considering margin.

$$\text{markup} = \frac{\text{Price}}{\text{Cost}} - 1$$ $$\text{margin} = 1 - \frac{\text{Cost}}{\text{Price}}$$

One reason you might use markup rather than margin is that you may not know the price. If you have something that costs one unit and you want 100% markup, then you find out that the price is two units.

$$\text{Price} = \text{markup}\cdot\text{Cost} + 1$$

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