In the sales world, there are two ways of looking at profit. You can look at profit compared to your costs, or you can look at profit based on your sales. When you compare profit to costs, you are looking at markup, but when you compare profit to sales, you are looking at margin.
Margin is just a way of calculating profit, while point margin is margin expressed as a percentage point. So, if you hear someone comparing margin vs. profit or margin points vs. percent of margin, these terms mean the same thing. Point generally represents 1%.
TL;DR (Too Long; Didn't Read)
To calculate point margin, first subtract your cost from the sales price to determine the margin and then divide that margin by the sales price.
Calculating Margin From the Sales Price
Margin is essentially the same as profit. Margin is the amount you have in your pocket after selling an item and subtracting your cost:
Margin = Sales Price - Cost
For example, if you sell a sweater for $50 and your cost for that sweater was $30, then your margin is $20. That's your profit in the transaction. If you sold the same sweater for $40, then your margin would be $10.
Calculating Point Margin
Point margin is simply your margin expressed as a percentage point instead of in dollars. You can calculate the point margin by dividing your margin by the sales price:
Point Margin = Margin / Sales Price
So, if you sold the sweater for $50 with a $20 margin, then your point margin was 40 points ($20 / $50 = 0.40). If you had sold that same sweater for $40, then your point margin would have been only 25 points ($10 / $40 = 0.25).
Calculating a Sales Price Based on Point Margin
Many businesses make it a matter of policy to sell items at a specific point margin. Suppose, for example, before you put your sweater up for sale, you decided you wanted to sell it at a 45-point margin. In this case, you can use the following formula:
Sales Price = Cost / (1 - Margin)
If the sweater cost you $30, then to sell it at a 45-point margin, the sales price would have to be $54.54:
Sales Price = $30 / (1-0.45)
Sales Price = $30/0.55
Sales Price = $54.54
Calculating Prices With Markup
While margin looks at profit based on the selling price, markup looks at profit based on the cost. Companies that use markup to calculate price simply add their markup to the cost of the item. For example, if you bought a shirt from a wholesaler for $10 and want to add a flat markup of $9, then the sales price would be $19:
Sales Price = Cost + Markup
Like margin, markup can also be expressed as a percentage, but it is a percentage based on the cost rather than the selling price. For example, if your company's policy is to mark up shirts by 40%, then you would multiply the $10 cost by 140% to get a $14 sales price.
Sales Price = Cost x (1+Markup Percentage)
Note that markup must always be more than 100% when you are doing the calculation, or you will lose money.
Margin vs. Markup
You should have probably noticed that when expressed in dollars, markup and margin work out to the same thing. That's because they both represent profit. If the cost is $8 and you sell an item for $20, then your markup and margin are both the same $12.
It's only when you look at the percentages or points that markup and margin vary considerably. As a final example, suppose you are selling a hat for $54 that cost you $30. Both markup and margin are $20. This is a markup of 180%, but it's a 44-point margin.
- AccountingTools: The Difference Between Margin and Markup
- GEM-CAR: How to Calculate Gross Margin or Selling Price Based on a Cost
- Forbes. "Cash Account vs Margin Account: Which Do I Need?" Accessed Aug. 15, 2020.
- Corporate Finance Institute. "Maintenance Margin." Accessed Aug. 15, 2020.
- Charles Schwab. "Margin: How Does It Work?" Accessed Aug. 15, 2020.
- Merrill, Bank of America. "Investing in the margins." Accessed Aug. 15, 2020.
- Corporate Finance Institute. "Gross Margin Ratio." Accessed Aug. 15, 2020.
- U.S. Department of Housing and Urban Development. "Adjustable Rate Mortgages (ARM)." Accessed Aug. 15, 2020.
- Consumer Financial Protection Bureau. "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?" Accessed Aug. 15, 2020.
A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.