Markup vs Margin
Markup: how much was added above cost. COGS $14 + 100% markup = $28 price. Margin: the profit percentage of the price. Price $28, COGS $14 = 50% margin. Same product — different numbers.
In practice
Markup and margin sound similar but are completely different. A 50% markup ≠ a 50% margin. A 100% markup = a 50% margin. The confusion leads to mispricing. A store that wants a '40% margin' but calculates a 40% markup ends up with a 28.6% margin — a loss on every sale.
Common misconception
'A 100% markup means doubling your money.' True that the price doubles the COGS. But margin = 50% (not 100%). Store owners who say 'our markup is 200%' actually have a 66.7% margin. Impressive-sounding — but after 30% marketing spend and 20% salaries, net margin could be just 10%.
How to fix it
Confusing markup and margin? (1) Margin formula: (Price - COGS) / Price × 100, (2) Markup formula: (Price - COGS) / COGS × 100, (3) Exercise: COGS $17, price $28. Margin: 40%. Markup: 66.7%, (4) For internal management, always use margin — because that's what remains from the sale.
Example
Apparel wholesaler: 'we work on an 80% markup.' COGS $13 → price $23. Margin: 44%. After: marketing 20%, salaries 18%, overhead 8% = 46% expenses. Net margin: -2%. '80% markup' sounds great. A 44% margin is the reality.
Priority
Set a policy: all internal reports use margin (not markup). Explain the difference to the team. Price based on a target net margin, not a target markup.
Related terms
Keep learning. Metrics that touch the same area:
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- Pricing StrategyFinanceThe strategy for setting a product's price. Types: Cost-Plus (cost + markup), Value-Based (what it's worth to the customer), Competitive (market-based), Penetration (low price to break in), Premium (high price to differentiate).
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- COGS – Cost of Goods SoldFinanceThe direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
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