Profit Margin vs. Markup — What's the Difference?

Profit Margin is calculated by dividing net profit by revenue, then multiplying by 100 to get a percentage. It's an indicator of a company's profitability and is often used to compare performance over time or against competitors. Markup, in contrast, is calculated by taking the difference between the selling price and the cost of goods, divided by the cost of goods, then multiplied by 100 to get a percentage. Markup is commonly used to set the selling price of goods.

In retail, Profit Margin can be viewed as what's left after all costs have been accounted for, including both the cost of goods sold (COGS) and other operational expenses. Markup, however, is just about the product itself—it doesn't take into account other operational costs.

Profit Margin is often used by external analysts to assess the overall health of a business. A high Profit Margin indicates a more profitable company. Markup is generally used internally to ensure that prices are set in a way that covers costs and ensures a profit.

Profit Margin can fluctuate due to various factors including economic conditions, competitive pricing, and operational efficiency. Markup is more directly controllable by a business, as it's a pricing strategy, but it can also be influenced by market conditions like supply and demand.