27 Aug What is the difference between gross margin and markup?

Gross margin and markup are both used in business to add a profit margin to a product or service that is sold. It really does not matter which one you use but most companies use gross margin (MAR or GM). Both are calculated differently and you do not want to mix them up!

Gross Margin:

Gross margin is the percentage of total sales revenue that exceeds the cost of goods sold (COGS). It shows how much money is left over from sales after covering the direct costs associated with producing the goods or services.  It helps businesses understand the profitability of their products after considering production costs. A higher gross margin indicates that the company retains more money from each sale to cover operating expenses and generate profit.$$\text{Gross Margin} = \frac{\text{Sales} – \text{COGS}}{\text{Sales}} \times 100$$

Markup:

Markup refers to the amount added to the cost of a product to determine its selling price. It shows how much above the cost a product is being sold for. Markup is used to set the selling price of a product. It shows the percentage increase over the cost of the product. $$\text{Markup} = \frac{\text{Sales} – \text{COGS}}{\text{COGS}} \tim$$

So thee key Difference is, Gross Margin is focused on profitability relative to revenue, indicating what percentage of sales is profit after covering COGS. Markup is focused on pricing strategy, indicating how much more than the cost price a product is being sold for.

Example:

• If a product costs R50.00 (COGS) and is sold for R100.00 (Sales):
  • Gross Margin: $\frac{100 – 50}{100} \times 100 = 50\%$
  • Markup: $\frac{100 – 50}{50} \times 100 = 100\%$

In this example, the gross margin is 50%, while the markup is 100%. So the percentage amount is significantly different. That is why you should never mix them up.