Markup vs. Margin: What’s the Difference and Why It Matters for Handmade Sellers?

Markup vs. Margin: What’s the Difference and Why It Matters for Handmade Sellers?

When it comes to pricing your handmade products, understanding the difference between markup and margin is essential. These two terms are often used interchangeably, but they refer to different aspects of pricing and profitability. Let's break down what each term means and how you can use them to set better prices and grow your handmade business.

What is Markup?

Markup is the amount added to the cost of a product to determine its selling price. It’s typically expressed as a percentage of the cost of goods sold (COGS). In simple terms, markup represents how much more you’re charging over what it costs you to make the product.

Formula for Markup:

Markup (%)=(Selling Price−CostCost)×100\text{Markup (\%)} = \left( \frac{\text{Selling Price} - \text{Cost}}{\text{Cost}} \right) \times 100Markup (%)=(CostSelling Price−Cost​)×100

Example:

If it costs you $10 to make a handmade necklace and you sell it for $25, your markup is:

Markup=(25−1010)×100=150%\text{Markup} = \left( \frac{25 - 10}{10} \right) \times 100 = 150\%Markup=(1025−10​)×100=150%

This means you are selling the necklace for 150% more than its cost.

What is Margin?

Margin is the percentage of the selling price that is profit after covering the cost of goods sold. Unlike markup, which is based on cost, margin is based on the selling price. It tells you how much of each sale is profit, which is crucial for understanding how much you’re actually making after costs.

Formula for Margin:

Margin (%)=(Selling Price−CostSelling Price)×100\text{Margin (\%)} = \left( \frac{\text{Selling Price} - \text{Cost}}{\text{Selling Price}} \right) \times 100Margin (%)=(Selling PriceSelling Price−Cost​)×100

Example:Using the same necklace example, with a selling price of $25 and a cost of $10, the margin would be:

Margin=(25−1025)×100=60%\text{Margin} = \left( \frac{25 - 10}{25} \right) \times 100 = 60\%Margin=(2525−10​)×100=60%

This means 60% of the selling price is profit after covering the cost.

Key Differences Between Markup and Margin

• Markup is calculated based on the cost of the product, while margin is calculated based on the selling price.
  

• Markup tends to be a higher percentage than margin because it is a percentage of cost, not selling price.
  

• Why It Matters: Knowing the difference is crucial for pricing your products effectively. For instance, a 50% markup is not the same as a 50% margin. Understanding these distinctions helps you avoid pricing errors that could lead to lower profits.
  

Which One Should Handmade Sellers Focus On?

For handmade sellers, both markup and margin are important:

• Markup is useful for setting initial prices. It ensures that all costs are covered and that there’s a reasonable profit margin built in.
  

• Margin is essential for understanding profitability. It helps you know how much money is left after costs are covered, which is vital for making strategic decisions about marketing, scaling, and reinvestment.
  

Get clear on your numbers! Knowing both your markup and margin helps you price confidently and ensures your handmade business stays profitable.

Question for You:

Do you calculate markup, margin, or both when pricing your products? Share your approach in the comments and let’s learn from each other.

Understanding the difference between markup and margin is key to pricing your handmade products effectively and ensuring the financial health of your business. With these insights, you can make more informed pricing decisions that align with your goals and growth plans.