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Markup Versus Margin in Cost-Based Pricing

Article Quant Q&A · Author: basti394
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Summary

The document clarifies two ways to express profit when setting a product’s selling price. A markup is calculated as a percentage of production cost, so the cost is increased by that percentage. A margin is calculated as the profit share of the selling price, so the price must be derived by dividing cost by the portion of the price left after the target margin.

Key ideas

  • Markup measures profit as a percentage of cost.
  • Margin measures profit as a percentage of selling price.
  • The two percentage definitions produce different selling prices for the same cost and stated rate.
  • Choose the pricing basis according to the business’s management objectives.

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# Which base to use to calculate profit of sold product?


# Which base to use to calculate profit of sold product?












Let's say I want to sell shoes, which cost me 90€ in production, and I want to sell them with 20% profit. Do I calculate my selling price then with 90€ * 1,2 (profit is 20% of costs) or with 90€/0.8 (profit is 20% of selling price)?

So do I calculate the profit from the costs of from my selling price?

## Answer by SuavestArt (score 2, accepted)

https://quant.stackexchange.com/a/78138

You refer to markup pricing and margin-based pricing, which are distinct pricing strategies.

In margin-based pricing, we're concerned about the difference between the product's selling price and its cost.

$\frac{(P_{selling} - P_{cost})}{P_{selling}} = 1 - \frac{P_{cost}}{P_{selling}}= Margin_{percent} $

$ 1 - Margin_{percent} = \frac{P_{cost}}{P_{selling}} $

$P_{selling} = \frac{P_{cost}}{1 - Margin_{percent}}$

Which relates to your second calculation of 'profit'. Your first calculation is the markup, which is a fixed percentage of the cost.

When it is appropriate using each pricing strategy seems to be a business management question, which is briefly discussed here

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.