*Quick answer in words (requested from the comments)*

**Margin** = The comparison between your **selling** price (100%) and your profit

**Markup** = The comparison between your **cost** price (100%) and your profit

Every time we get a new member of staff I have to teach them how to work out margins and mark ups. This page is here so I don’t have to explain it from scratch for the next new person.

### Whats a mark up & whats a margin?

They are terms given to the way a business works out how much money it will make or has made on a product. Its the difference between the buying price and the selling price as a percentage.

Mark ups and margins are all about percentages. Despite learning percentages at school everyone seems to have forgotten them by the time they get to work, so lets start at the beginning:

### What is a percentage?

Percentages are away of comparing different values using a ratio. I think it comes from the French phrase ”Per Cent” meaning “per hundred”

Example time

It you have a 100ml jar that is full (100ml) it is at 100% capacity and 100% of its volume. If it is only half full (50ml) it is at 50% capacity and 50% of its volume. Easy so far.

You choose where your 100% begins and thats where many people start to get confused. Lets say I wanted to put a chemical in my jar and the safe maximum level was 50ml. It I fill the jar to 50ml it is now at 100% capacity. It l over fill it to 75ml it is now at 150% of its safe capacity yet at the same time only 75% of its volume.

### How do we work that out?

- throw away your Calculators % button. It is only there to confuse you!
- Start with 100 and divide it by your unit of measure that is 100%.In the above chemical jar example 100% safe capacity was 50ml So 100 / 50 = 2
- Multiply by the actual unit of measure you have. In the example above, our overfilled jar held 75ml so 75 * 2 = 150, which is your answer as a percentage, the chemical jar was at 150% of its safe capacity.

### Now we know about percentages, let’s apply that to mark-ups and margins

To do this I first want to tell you percentages best kept secret!

100% of 1 is 1.

50% of 1 is 0.5.

So to turn a % into a decimal just move the point two places to the left

75% becomes 0.75,

62.5% becomes 0.625

(or if you get very scared by not using the calculator, just divide by 100. 100 / 100 =1 , 50 / 100 = 0.5, 75 / 100 = 0.75)

Mark ups and margins are all based around percentages.

Lets start with a mark up calculation.

You are given a buying price (50) and told to mark up by 50%

50 * 0.5 = 25 euros

Add them together 50 + 25 = 75

Lets try that with Britains most popular mark up, VAT (Value Added Tax for my friendly non British readers). VAT is (at the time of writing) 17.5% added to the selling price of many products and handed to the government to pay for part of running the country.

17.5% as a decimal is 0.175

50 * 0.175 = 8.75

Add them together 50 + 8.75 = 58.75

It gets better though, if you want to know only the total including vat you can take a shortcut. 100% = 1, 17.5% = 0.175, added together 1.175, so

50 * 1.175 = 58.75

In other words, our total including the VAT mark up is 117.5% of our starting point. Our starting point is the price without the vat (100%).

One more example then, 66 + a 50% markup in one go:

66 * 1.50 = 99.

What about taking off a markup? Lets say you’ve been given a book of retail prices including VAT and you have to load them onto a computer without VAT. It’s simple when you remember the VAT total is 117.5% because division ( key: / )is the opposite of multiplication ( key: * ). Note, on your calculator it looks like .

58.75/1.175 = 50

Remove our 50% mark up

99/1.5 = 66

Be careful! This only works when you have more than 100% to begin with. Eg, you cannot do 99/.5 to find out what the 50% was, 99/.5 = 198!

So, with a mark up our starting figure (eg cost) is 100%. You can have a markup of any value, eg 300%

### Now for margins

With a margin our ENDING figure is 100%. You can never have a margin equal or greater than 100%

Sometimes you’ll be given a selling price (eg recommended retail price, RRP) if you have 33% margin, what price do you put on your purchase order? (in this case, margin is our profit).

50×0.33= 16.50

Which is our profit, so 50 – 16.50 = 33.50 Our buyingprice

Again we can shortcut this to find our cost price. If we know that if 33% is our margin then 67% must be our buying price, so 50×0.67 = 33.50

What about when we have a buying price. A margin of 33% and we need to knew the selling price?

We know that if our margin is 33%, our cost must be 67% (our selling price with a margin calculation must always be 100% so 100% – 33% profit margin = 67% for the cost).

We can divide our cost price by the cost percentage to return to 100% selling price, eg:

33.50 is 67% of our 100% total, so

33.50 / 0.67 = 50

### Still with me on this?

Lets try comparing some mark ups and margins and see what happens.

A sales rep once said to me “You’ll make more selling my product because the price list I give you has a 50% profit; everyone else is using 40%.”

The trouble is he was talking about profit as a mark up calculation in his book and everyone else was talking in margins.

A £75 product in his book had a profit of £25

(Using mark up: selling price = 150% of cost price, cost price = 100%, so £75 / 1.50 = £50 cost, therefore £25 profit).

A £75 product in everyone elses book had a margin of £30

(Using margin: selling price = 100%, margin = 40%, therefore £75 * 0.4 = £30 profit)

So, a 40% margin is better than a 50% mark up.

### Heres one for people who arent in business.

Have you ever been tempted by the banners proclaiming “Sale prices – Well pay the 17.5% VAT”? Great! A 17.5% discount. right?

Thats what the marketing department want you to think, but as you now know, VAT is a markup calculation so to arrive at the excluding VAT price you DO NOT deduct 17.5%. Lets work out what the real discount is, assuming our 2 fictitious bargains are £100 for the Kanga and £117.50 for the Roo respectively, including VAT. Lets remove the VAT the right and wrong way.

A VAT inclusive price is 117.5% of our original price, so:

Kanga: £100 / 1.175 = £85.11

Roo: £117.50 / 1.175 = £100.00

are the correct after VAT removed prices.

Lets assume the marketing department sent the wrong poster to be printed:

“Save 17.5%, buy our Kanga and Roo today” it proclaimed.

17.5% as a decimal is 0.175 (simply move the decimal two places like we said earlier)

Kanga: £100 * 0.175 = £17.50 discount = £82.50 left to pay

Roo: £117.50 * 0.175 = £20.56 discount = £96.94 left to pay

Thats right, if the sign proclaims you save 17.5% – it’s wrong, you actually save

(working this out using the same process as above so you see how it works again):

- throw away your calculators % button. It is only there to confuse you!
- Start with 100 and divide it by your unit of measure that is 100%. In the above, 100% of the VAT inclusive price was 100 for Kanga So 100 / 100 = 1
- Multiply by the actual unit of measure you have. In the example above, our after VAT price is 85.11 so 85.11 * 1 = 85.11

We know 85.11% is our before VAT price, so VAT content was 100% – 85.11% = 14.89%

I guess Save 14.89%, buy our Kanga and Roo today just doesnt have the same ring on a poster.

*By the way, if you’re wondering why i used $ instead of £, I wrote most of this entry on a Coach travelling through france and it was simply quicker to write on my PDA 🙂 ** Corrected!*

Thanks you’re a lifesaver. I just couldn’t work out why the answer was 1,600,000 (given goods sold were 2,320,000 with a mark up of 45%.) I had tried every calculation know to man before I found your website.

2,320,000 / 1.45 it’s so easy

#

Bradford

Posted June 5, 2009 at 5:00 pm

I had learned that until you get to 50% mark up that the following formula Works:

Example: $5.00 Divided () .70 And/or 30% = $7.1429 Mercantile Markup.

Now to double check for those who refute this formula:

$7.1429

– 30%

_______

Subtotal= (-) $2.1129 = Your Original $5.00

.99=1%

.98=2%

.97=3%

.96=4%

.95-5% And So Until Your Reach .51=49% When you go beyond .50 The formula changes. Soooooooo, What Would You Do Beyond .50 ? LOL Having fun yet? Does anyone have any additional input besides and beyond?

Kindest Regards,

Brad Agape1another@gmail.com

Thanks,

I keep forgetting this and where I found the answer online. At least I understand it for another year.

Thank you for the easiest learning method (common sense).

Thank you

Hi.

I think you had a small distraction back there: “100 / 1 =1”. You forgot those 2 zeros: 100 / 100 = 1. Nice article, thanks.

Regards,

Paulo

Thanks for spotting, fixed 🙂

Thanks for a great blog! I came across it as I’m about to go back to work as a buyer after a few years out of the game and am just refreshing myself with basic calculations. Can you help me with something else please? I assume the above margin calculations are based on gross margin, but what do you do when you’ve been given the net margin?

I know the following:

Net margin: 59%

Sales price: £16.99

Cost price: £4.44

Based on this, I’ve calculated the gross margin to be 74% so I could work with that, but is there a way to do your margin calculations using the net margin please? That is, if you know the cost price and net margin, can you calculate the sales price? Or if you know the sales price and net margin can you calculate the cost price?

Hope this makes sense – I’m just in a bit of a pickle about the net margin (as buyers in my industry – fashion retail – are given net margin targets)

Thanks in advance!

I’m not entirely sure how you’re describing/using the difference between ‘Net’ and ‘Gross’ in this situation.

I was once told the way to view the difference is ‘Gross is everything, Net is the important bit’. For example, in a business profit and loss account we might have:

Sales: £100

Purchases: £40

—————

Gross Profit: £60

Rent: £10

Wages: £10

—————

Net Profit: £40

So gross profit is related to each product sold, but as a business the net profit, what we’ve earn’t after overheads, is the important bit.

I’m going to *assume* (dangerous!) that your industry is looking at the margin being calculated against the Gross Profit as well as the Net Profit. With this logic, my examples in my blog post apply to Gross Margin. That is, the margin is calculated with the Sales Price = 100%. For your figures:

Sales Price = £16.99 = 100%

Cost Price = £4.44

100% / £16.99 * £4.44 = 26.133% (So cost is 26% of selling price and Therefore margin is 73.867%)

Let’s check that: £4.44 / 0.26133 = £16.99. Good, I agree with your 74% Gross Margin.

Can we calculate the Net Margin? Not really as our Net Margin varies with our sales. Let’s use your 59% Net Margin for some examples to work out what our overhead cost.

Sales Price = £16.99 = 100%

59% Net Margin = 41% Cost, so

£16.99 * 0.41 = £6.97 Cost

Our product cost £4.44, therefore our overhead is the difference £6.97 – £4.44 = £2.53 Overhead.

Let’s rewrite that like a profit and loss account so we can see all the figures clearly:

Sales Price = £16.99 = 100%

Cost Price = £4.44 = 26.133%

Gross Profit = £12.55 = 73.867%

Overhead = £2.53

Net Profit = £10.02 = 59%

Now we know that, we can also predict our Net Margin if we were to sell two products:

Sales Price = £33.98 = 100%

Cost Price = £8.88 = 26.133%

Gross Profit = £25.10 = 73.867%

Overhead = £2.53 (our overhead doesn’t change)

Net Profit = £22.57 = 66.42%

So you might wonder why a Net Profit Margin is of use. You can use it to compare company performance from one year to the next. You can also start playing with numbers and what ifs. EG:

What if…. you reduced your Gross Margin by 5% but as a result tripled your sales. Would you make a higher or lower Net Profit?

What if… you increased your Gross Margin by 5% and therefore sold 10% fewer products.

I hope that’s helpful.

Oh boy. I am glad that I have stumbled on this site. I am a fashion Designer started my own company. Just graduated a couple of years now, this whole margin and mark up has gotten me in a huge worry and a confused . I have a few buyers now that want to meet me in the next weeks and I need help understanding this a bit more . calculating ok I know my costs for my designs how to calculate my retail price ? and whole sale price for buyers?

Could someone help me out a little please

Hi Steve,

Thanks so much for getting back to me and clarifying a few things! It’s good to be reminded of the basics e.g. multiplying sales price by cost % to get cost price. I’m awfully rusty, so this helps a lot.

I see what you mean by:

“Can we calculate the Net Margin? Not really as our Net Margin varies with our sales.”

However I’m pretty certain as buyers, we are always given a net target margin. Looking at your example now, and agreeing that net margin would vary according to volume sold, I’m wondering how this is possible. If you have any further thoughts please let me know. Maybe the company works out some sort of generous, average coefficient to ensure minimum target is always achieved.

Anyhow I start my job in a couple of weeks when all will be revealed! Thanks again for your help – this is a terrific blog.

When you find out how they’re calculating it, it would be great if you post back so others know.

My best guess; They allow for overheads as a percentage of a known amount.

So if last years overheads worked out to be 10% of the cost, assume this years is 10%.

Better still, think about what is likely to happen this year and set a new percentage as a best guess. EG: If you expect sales to double you might only add 5% of a given cost to allow for the overhead. Obviously this will be inaccurate but it will be consistant month to month, reasonable and save the added cost of calculating everything constantly. You can even change the rate for different product types. If dresses cost more to advertise than T-Shirts and therefore contribute more to the overhead you can calculate accordingly.

Net margin – that is not an accounting term. There is net profit but that is the bottom line of a profit an loss account.

I think what they are after is either the net margin excluding VAT or the net margin after all costs of getting it to you. So you need to factor in shipping cost and any import duty not just garment cost.

If I’m right then its like this:

So you sell a coat in a shop to me at £120.

that includes 20% VAT

The actual sale value net is £100.

You, the shop owner, bought it from your supplier at £30 plus VAT. So it cost you £36.

You have to give the VAT man £14 on this coat.

But your profit was £100 less £30, ie £70. So that is a margin of 70%. Very nice. It is the net margin.

Or, say the coat was imported and you had to pay shipping.

The coat still cost £30 itself but getting it here cost £2 transport plus £3 import duty. Its cost is not £30, but £35.

So you made £65 profit or 65% which is still quite nice but not as nice.

I don’t think the advice above about overheads is right at all. I would not expect my buyers to be faffing about worrying about overheads – I would just be targetting them at getting a margin that is in the right band. But remember it is £££s not just % that count. Brilliant margins are useless on rubbish sales. Crappy margins on mega sales can be much better.

And, quite frankly, if I was your head buyer or FD, i’d be very happy for you to just say, “so when you refer to Net Margin, how are we defining that here?”. Its a fair question and will save you a lot of bother down the line! Good luck.

Thanks, that sounds like the most likely given what I know. I will definitely report back once I know in 3 weeks. This has been very helpful, much appreciated!

Hi great post –

As an importer i am trying to work out the margins the retailer would make based on my wholsale price to them. Im guessing i should do this Net of VAT ?

As both Margin and VAT are percentages, you’ll get the same result both ways.

Example:

Cost £10 ex VAT or £12 inc VAT (VAT = markup 20% = £10 *1.2)

Sell £20 ex VAT or £24 inc VAT

Ex VAT Margin = 100/£20*£10 = 50% Margin

Inc VAT Margin = 100/£24*£12 = 50% Margin

However, if you are then going to calculate profit you should use the Ex VAT amounts. The extra money you’ve taken for VAT (Value Added Tax) belongs to the tax man. You have

earned£10 (that’s the ‘value added’ by you with a 50% margin), the £12 youreceivedincluding VAT includes the tax at 20%, or £2.Hi Steve,

Right, I’ve started my new job and I promised to get back to you. I have to hold up my hands and admit that I was in a complete pickle about this margin calculation. I wrongly assumed the different margins were down to them being either net or gross when it was actually the VAT I wasn’t factoring in. Just to confuse matters further the example I was using dated from 2005 when VAT was 17.5%. Hence it’s actually a fairly straightforward Gross Margin calculation:

(Selling Price – Vat – Cost Price) / Selling Price = Margin

So using the same amounts as above (Sales price: £16.99, Cost price: £4.44) the calculation looks like this:

(16.99 / 1.175 – 4.44 ) / 16.99 = 59%

At least we got to the bottom of it eventually! Thanks again for your time.

very nice, iwas looking for the diference and finally found it

thank you

Hi,

I too was i a bit of a muddle – but that’s sorted now.

The question I have is how do I know if I’m talking apples and they are talking oranges (or vice versa)?

What I mean to ask is “is there a convention where we should only talk in one and not the other to avoid confusion?”

Is it better to talk in mark up or margins?

Thanks

I think it depends a great deal on the conventions of your industry, so the only way to avoid confusion is to ensure the % you’ve been given includes whether it is a mark-up (add to cost to get selling price) or margin (deduct from selling price to get cost).

Hi, how do you do multiple rebates % to give a true value of what the total discount would be.

I.e. 3% + 6% + 8%, is this 17%

probably not 17% but it depends on how your supplier intended you to do it, more likely

100*0.97*0.94*0.92 = 83.8856 remaining, so

100 – ( 100*0.97*0.94*0.92 ) = 16.1144%

My answer got a bit long for comment, here’s a blog post just on this: https://www.steveroot.co.uk/2016/12/02/margins-and-markups-how-to-handle-multiple-discountsrebates/

Cheers Steve,

A well written easy to understand explanation

Life should not be that difficult

Best,

Broadsword

Hi Steve

I don’t understand coefficients, like distributors say they work to a coefficienty of 5. What is this

Thank you

John

Hi John,

I’ve not come across that term before but this page I found via google http://www.creveld.com/pricing.html describes it. I haven’t cross checked the logic but it seems sound. Short version: They use the term ‘co-efficient’ to be the percentage representing the Buying Price. So

Selling Price = 100% = £100

If Margin = 30% (how much of the selling price is profit) = £30

then Coefficient = 70% (how much of the selling price is the cost) = £70

Hope that helps

So in my post I said to turn margin

PS – Not entirely sure this applies to your situation. If you’re given a coefficient of 5 this method would imply that the cost is just 5% of the selling price. Perhaps they have their own system & terms. If you find it’s different for your suppliers please let me know and we can add some notes to help others.

Studying some revenue standards and I just couldn’t get a hang of “margins”.

All the way from Nigeria, thanks a lot!

Steve,

I really should know this stuff so being able to get the info covertly from a website was great. Its really well explained, you’re a natural teacher.

Many thanks,

Toby

So say I had a shop that sold pens, of 4 variants, red, blue, black and green.

Blue makes up 40% of my sales, black makes up 30%, red 20% and green 10%

I make a 30% margin on red and green but only a 15% margin on Black and Blue

How would I calculate greens contribution to my total profit?

Hi M1tch,

That’s not really a question about how to work out Margins. Also, you’ve not said whether the pens are being sold for the same price (20% margin for red at £2 each (40p) is equal to 40% margin for blue at £1 each (40p).

However, if we assume they are selling for the same price I’d work it out by creating a table in my mind for each sale. I’ll use 10 products sold (’cause it’s easy to turn into 100%). Therefore of our 10 sales, 4 are blue, 3 are black, 2 are red and 1 is green. In the second column I’d write down the profit (or in this case, margin% == profit, ). Add that up then work out how much of that total profit

Colour | Margin |

Blue | 15%

Blue | 15%

Blue | 15%

Blue | 15%

Black | 15%

Black | 15%

Black | 15%

Red | 30%

Red | 30%

Green | 30%

============

Total| 195% units (remember, we’re using the % given in place of an actual profit amount).

Green = 30% units from our 195% units total profit

100 / 195 x 30 = 15.35% of our profit is due to green sales,

so Green contributes 15.35% of our profit

If you made £100 profit, £15.38p of that was due to Green.

—

I Just re-read this, and thought it’s probably also relevant to know the revenue(turnover) too.

To get 195%-Units of margin, we ‘sold’ 1000%-units of products.

We can now work out average margin is 19.5%

Therefore, our turnover for £100 profit = 100/0.195 = £512.82 of sales.

This is also the same as saying: Sell 10 pens for £51.28 each. You’ve sold 1 green one with 30% margin = £15.38.

what is the difference between Mark ups and margins in words, not calculations?

Margin = The comparison between your selling price (100%) and your profit

Markup = The comparison between your cost price (100%) and your profit

Hi

I am very confused, sorry!

Taking the example above, if I wish to remove VAT of 17.5% from the retail price of£58.75, i would do this:

58.75 x .175 = 10.28

So, 58.75 – 10.28 = 48.47 is the retail price without VAT

BUT

If I do it according to your method it is 58.75/1.175 = 50 is the retail price without VAT.

Two different retail prices without VAT (48.47 and 50 respectively).

What am I doing wrong?

Thanks

Ash

“if I wish to remove VAT of 17.5% from the retail price of£58.75, i would do this: 58.75 x .175 = 10.28”

is the error.

VAT is markup calculation. The EX VAT is 100% then add VAT of 17.5%, so your total is 117.5% [50 + (50*0.175) = 58.75 which is the same as 50*1.175]

Therefore removing the ‘markup’ of VAT can be 58.75/1.175

If the 1.175 is confusing, note that 100% = 1 as a decimal, so 17.5% = 0.175 as a decimal. Therefore 117.5% = 1.175 as a decimal

If you have 117.5% of something and want to know what 100% is, divide what you have by 117.5 units to get 1 unit(%), then multiply by 100 units(%) to get 100 units(%).

So [divide by 1.175] is the same as [divide by 117.5 then multiply by 100]

Hope that helps!

Thank you for the great post. Let say I buy product for £15 which I need to sell to a wholesaler. Without any other details is there any “golden rule” how to multiply the cost to get the wholesale price? For example if I multiply the cost by 3, I have a price £45.

Hello Hana,

There is no golden rule as it is very much dependant upon the individual business.

If you buy and sell sweets (low value product) you’ll probably need a very high margin (or higher mark up) to have a viable business

If you buy and sell aircraft parts (high value product) you probably have a lower margin (or lower mark up) to have a viable business.

A couple of examples in numbers:

We have a sweet shop and an aircraft engine seller. Let’s say both businesses need to make the same profit (£200), with the cost being the sum of raw materials + wages as the basis to work out our margin & mark up.

Sweet shop

==========

You have one employee who can sell 500 x £0.10 sweets a day. The employee is paid £100 per day.

Raw materials: 500 x £0.10 = £50.00

Wages: £100

Profit needed: £200

Total revenue needed = £350.00 (adding up raw materials + wages + profit needed)

Markup % = 100/(raw materials)*(total revenue-raw materials) = 100/(50)*(350-50) = 600% Mark up on raw materials will cover our wages and profit. [1]

Margin % = 100-(100/(total revenue))*(raw materials) = 100-((100/350)*50) = 85.74% margin will cover our wages and profit.

Jet engine supplier

===================

You have one employee who can sell 1 engine a day. The employee is paid £100 per day.

Raw materials: 1 x £100,000 = £100,000

Wages: £100

Profit needed: £200

Total revenue needed = £100,300 (adding up raw materials + wages + profit needed)

Markup % =100/(raw materials)*(total revenue-raw materials) = 100/(100,000)*(100,300-100,000) = 0.3% Mark up on raw materials will cover our wages and profit.

Margin % = 100-(100/(total revenue))*(raw materials) = 100-((100/100,300)*100,000) = 0.30% margin will cover our wages and profit. [2]

[1] Selling price = Raw Materials + Mark Up = 50 + (50*600%) = 350

[2] This is very low compared to the examples in the blog, so if you want to get your selling price from buying price it would be 100,000/0.997 = 100,300)

Hey Steve!

Relating to the topic a quick, simple question:

If i was given the information of the sell price of an item which includes the VAT % AND the profit %, how do I figure out the cost of the item?

Say the item costs 880 USD, VAT is 21% (In Spain) and Profit of 34%.

Cheers,

Daniel

Assuming ‘profit %’ is a margin (it’s not clear from the question), you can do this in two steps (I’ve broken those steps down into their logic, hopefully making it clear)

Step 1: Remove VAT

Step 2: Calculate cost from selling price for a given margin

1a) Retail inc VAT = 880USD

1b) Remove VAT. Vat = 21% so inc. VAT = 121% of ex vat price = 880/1.21 = 727.27

2a) Retail ex VAT = 727.27USD

2b) Remove margin, margin is 34% so cost is 66%. Mulitply by 0.66 to get 66% = 727.27*0.66 = 480

HTH

Hello guys !

It has a product or service and do not know what the sale price put? This application can help you find the ideal selling price for their products / services! : D

https://play.google.com/store/apps/details?id=appinventor.ai_lucas060994.Markup

just ridiculously complicated. For a non-maths person, my brain started to freeze after paragraph one. Nice effort though.

Hello,

i need your help with this question:if you increase the price of the product by 150 you have to multiply the original price by the factor

a/150

b/1.25

c/3,25

d/2.5

Sounds like a test, perhaps you should give the answer you think too and I’ll be able to help you understand the logic rather than just have an answer.

However, the question is incomplete. 150 of which unit? percentage? currency?