Pricing Strategy Markup vs Margin

Most business owners have a loose idea of their unit economics (margin at the product level), but it's usually:

1. Stuck in their head; and
2. Crude back-of-the-napkin math.

Your pricing strategy can make or break profitability... generally, I see companies fall into 2 buckets: those with revenue or pricing problems, and those with cost or expense control problems.

Today, we'll drill deeper into a pricing concept that trips up most business owners – markup vs. margin.

What is it?

• Markup – percentage added to your cost to determine selling price
• Margin – percentage of your selling price that becomes gross profit

Here are the formulas for us nerds:

Stated simply, markup starts with cost and margin starts with selling price. If you have a good handle on your product costs, lead with markup. If you're not sure about your costs today, experiment with various selling prices at your desired margin and see if you can get your costs down to the required level.

A helpful tool

Here's a simple table showing you the markup and margin math for a product (or service) with a cost of $100 at various selling prices. Feel free to download a copy and use this tool yourself.

Why this matters?

If you're mixing up these 2 pricing concepts, you could be leaving a huge chunk of profit on the table.

Back to the chart above... Let's say you (mistakenly) think you have a 50% margin by pricing your $100 product at $150. You'll scratch your head wondering why you keep cranking out losses each month with such solid margins.

To make matters worse, you decide to run a Labor Day promotion (see below!) at 35% off since you've got those juicy 50% margins. Your $150 selling price becomes $97.50 at 35% off and now you're losing money on every sale! Ouch.

It should be obvious that you'll want a good handle on your pricing (even if it's crude back-of-the-napkin math!). Don't forget, you'll need to know your costs to get the most out of this exercise.

Key takeaway – Know the difference between markup and margin. Best practice is to determine selling price using a desired margin level. A simple rule of thumb is 2x (200%) markup = 50% margin.