Communicating simple accounting and finance measures to colleagues can be a challenge. Take, for example, gross profit margin percentage and mark-up percentage or simply margin versus mark-up. To non-finance professionals these two measures may seem to be interchangeable. But they’re not. Mark-up percentage is generally a marketing measure used in pricing decisions made by marketing professionals. Financial professionals use gross profit margin percentage as a measure when reviewing a company’s income statement.
Margin Versus Mark-Up
Calculate mark-up percentage by dividing a product’s unit cost by the gross profit. You get gross profit by subtracting a product’s unit cost from its sales price and assuming that cost reflects COGS on a per unit basis. Gross profit margin percentage is when you divide the amount of gross profit by sales on the income statement. Compute it on a per unit basis. So the primary difference between the two percentage calculations lies in whether gross profit is divided by cost or by sales. Differences may also exist due to the product costing method you use to determine the cost per unit sold.
It may be helpful to explain to non-finance managers the impact of a prospective price increase in terms of gross profit margin percentage. Then leave out the mark-up measure altogether.