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    1. Jamesred is offline

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      #1

      Whatís the Difference between Margin and Markup?

      Iíve just started an online business. Terms like markups and margins really confuse me. Can somebody explain whatíre the differences between both the terms?
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    2. Maria_wand's Avatar
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      #2
      Many people get confused between markup and margin. Most of them think that they mean the same. But, itís not so.

      Markups - It is the percentage of cost price that is the added to the cost price to get the sale price. Let me explain this with an example. Suppose you have bought a CD for $10. You decide to sell it at a markup of 100 percent, which means a markup of $10 * 100/100 = $10. This means your sale price should be $10 + $10 = $20.

      The formula for percentage markup is (Selling Price Ė Cost Price)/Cost Price * 100

      Margins - It is the profit margin that you earn by selling your merchandise. Let me continue with the above example, you bought the CD at $10 and sold it for $20, this means your margins are $10/$20 * 100 = 50%

      The formula for percentage margin is (Selling Price Ė Cost Price)/Selling Price * 100
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      #3
      You have very well explained the concept of markup and margin. Iíd like to tell the readers that the basic difference between markup and margin is that the percentage markup is expressed in terms of cost price while the percentage margin is expressed in terms of sale price. Therefore, markup is always higher than margin.

    4. WheresAnnie is offline

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      #4
      I’m giving here another formula for calculating markups and margins.

      Markup = Gross profit margin/cost price X 100
      Margin = Gross profit margin/sale price X 100

      Suppose you bought an item for $100 and sold it for $125, your gross margin is $25. In this case, your markup is $25/$100 X 100 = 25 % and percentage margin is $25/$125 X 100 = 20%

    5. Jamesred is offline

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      #5
      Yeah, I have understood the meaning of markup and margin, but I want to know why markup is used.

    6. Maria_wand's Avatar
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      #6
      Markup helps a company to decide the sale price of its products taking into account the variable costs and desired profits. Variable costs include the cost of manufacturing or buying items and cost of handling, shipping, and packaging.

      Gross Margin = Markup/(1 + Markup)

      Sale price = Cost price + Markup

      Some companies also consider the operating expenses while deciding their markups. Operating costs are fixed expenses that include the rent of office, the salaries of employees and so forth.

    7. WheresAnnie is offline

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      #7
      How should I decide the price of my items? Should I simply decide my margins and then add the markup to the cost price of items?

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      #8
      No, you canít price your items like this. I wish all this was as simple but in reality itís not.

      You have to keep several things in mind while pricing your items and one of them is competition. If the items you are selling have good competition, you canít decide their price by yourself. You have to check the rates at which the same items are being sold in the market. If you set the prices too high, there will be no customers for your products and if you set the price too low, it may start a price war or you may suffer losses.

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      #9
      I agree with you. Though, markup and margin are used to decide the sale price of items but there are several other factors that you canít ignore. Some of them are competition, customersí requirements, exclusivity, and customer service.

      Basically, there are three types of pricing Ė cost pricing, competition pricing, and customer pricing. If your item is new or unique, you could use a cost pricing technique to decide the price of your item. This is the simplest pricing method in which the markup or margin is added to the cost price of item to arrive at its sale price. If competition is high for your item, youíll need to use competition pricing technique and if you want to attract maximum customers you should use customer based pricing, which takes into account the price that the customers would be willing to pay for your items.

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      #10
      Apart from margins, what are the factors that should be taken into account while deciding the markup?

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