Difference Between Gross Margin and Markup

DIFFERENCE BETWEEN GROSS MARGIN AND MARKUP

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DIFFERENCE BETWEEN GROSS MARGIN AND MARKUP

The terms margin and markup are very commonly juxtaposed by many people; however, they are not one and the same thing. Gross Margin and Markup are two sides of the same coin. Both are accounting terms which refers to the two ways of looking at business profit. When the profit is addressed as the percentage of sales, it is called Gross Margin. Conversely, when profit is addressed as a percentage of cost, it is called as Markup.

While Markup is nothing but an amount by which the cost of the product is increased by the seller to cover the expenses and profit and arrive at its selling price. On the other hand, the Gross Margin is simply the percentage of selling price i.e. profit. It is the difference between the selling price and cost price of the product.

 

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COMPARISON CHART

BASIS FOR COMPARISON GROSS MARGIN MARKUP
Meaning Gross Margin is a profit margin, that measures the profitability of the company, i.e. the proportion of income left over in the business, after paying cost of production from revenues. Markup refers to the value added by seller to the cost price, to cover its incidental costs and profits, in order to arrive at its selling price.
What is it? Percentage of selling price. Cost multiplier
Function of Sales Cost
Perspective Seller Buyer
Formula (Price – Cost) / Price (Price – Cost) / Cost
Relationship Gross Margin = 1 – (1 / markup) Markup = 1 / (1 – gross margin)

 

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DEFINITION OF GROSS MARGIN

Gross Margin implies the ratio of profit to the selling price. It is the difference between the cost of production/purchase of a product or service and its selling price. It is the gross profit margin for a particular transaction, i.e. the profit earned on a product or service, expressed as a percent of the selling price of that item.

In general, gross margin is used when both cost price and selling price of the product or service are known, but you want to have an idea of profit you made on a specific transaction. It can be calculated as:

Margin = (Selling price − Cost) / Selling Price


Example

Suppose you purchase a product for N400 (cost price) and sell it for N500 (selling price),

Gross Margin = (500-400) / 500 x 100 = 20%

DEFINITION OF MARKUP

Markup refers to the amount added to the cost price of a product or service to cover expenses and profit. It is the difference between cost price and selling price. It is the percentage of cost price you add on to reach the selling price of the item.

The amount added to the total cost of production incurred by the producer so as to cover the overheads like labour, material, taxes, interest, etc. and profit, is markup. It can be calculated as:

Cost X (1+Markup) = Selling price
Or Markup = (Selling price / Cost) − 1
Or Markup = (Selling price − Cost) / Cost

Example

Suppose you purchase a product for N400 (cost price) and sell it for N500 (selling price),

Markup = (500-400) / 400 x 100 = 25%

 

KEY DIFFERENCES BETWEEN GROSS MARGIN AND MARKUP

The following points are significant so far as the difference between gross margin and markup is concerned:

  1. A financial metric that measures the profitability of the company, i.e. the proportion of income left over in the business, after paying the cost of production from revenues is called Gross Margin. The value added by a seller to the cost price, to cover its incidental costs and profits, to arrive at its selling price, is called Markup.
  2. The margin is the percentage of sale price, while markup is a cost multiplier.
  3. Gross Margin can be calculated, by taking sale price as its base. On the other hand, cost price is considered as the base for the calculation of markup.
  4. The gross margin is the seller’s perspective of looking at profit, whereas markup is the buyer perspective of the same.
  5. The gross margin is the difference between selling price and cost price, divided by selling price. Conversely, Markup is the difference between selling price and cost price, divided by the cost price.

 

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CONCLUSION

So, from the above, it is very clear that Gross Margin and Markup are the two different outlooks of profit. ‘Markup as it is calculated at cost price, the percent is always greater than that of a percent of Gross Margin’.

 

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