Markup and Margin are often mixed up with each other. Many people mistakenly believe that a product marked up 25% will result in a 25% gross margin. However, it would actually be a 20% gross margin.
The difference is as follows:
The Markup ratio is Profit/Cost
The Margin ratio is Profit/Sell
Here's some Math:
Margin is defined as sales minus cost of goods sold. It is expressed as a percentage of sales.
So if a product is sold for £125 and cost £100 to buy, the profit is £25 and the margin is 20%.
£25 "profit" / £125 "sell" = 20% margin
Markup is used to show the difference between a products cost and sell prices. It is expressed as a percentage of cost.
So if a product is marked up to a £125 sell price from a £100 cost price, the profit is still £25 and the markup is 25%.
£25 "profit" / £100 "cost" = 25% markup