Many handmade sellers often use the terms markup and profit interchangably, however they do have different meanings and are calculated differently.
Markup is essentially the amount added to your production cost price to arrive at a price. It is a commonly used technique to add a consistent profit margin to your product prices.
For more details on how to calculate markups on your products, see our article here: How to calculate pricing markups for your handmade products »
Your profit margin is a metric that determines how much revenue you are bringing in for your product relative to its cost to produce. Profit margin is usually calculated as a percentage so that it can be easily compared across your entire product range.
To calculate your profit margin, you’ll start with the selling price of the product (Price). From here, subtract the cost to produce the product. The resulting amount is your gross profit. Now, divide the gross profit by your price to get the gross profit margin.
The formula to use to calculate your profit margin is as follows:
To show the difference between profit margins and markups, the following table shows some examples:
|Base Cost||Markup||Price||Profit Margin|
As you can see, as you add a bigger markup to your product your profit margin also increases - however they do so at a completely different rate.