Calculating product mark-ups and profit margins can be confusing at first because both calculations contain numbers that relate to profit. Sometimes business owners even use the terms interchangeably, not realising that they are in fact different calculations, reflecting different things. Let’s take a look at a practical example to illustrate the difference between them…
Product Mark-Up Percentage
The Beauty Store is a store which sells skincare and beauty products. The cost price of one of their products – a face cream – is R100.00. The Beauty Store gives this face cream a product mark-up of 75%. What is the selling price of the product?
- 75% of R100.00 = R75.00
- R100.00 + R75.00 = R175.00
- Hence the selling price is R175.
It’s important to note that the product mark-up value, in rands, (in this example, R75) is not pure profit. A portion of this amount will be used to pay business expenses, such as salaries, rent, advertising costs etc. To know how much profit we’re making, we must calculate the profit margin percentage.
Profit Margin Percentage?
To calculate profit margin percentage, divide the selling price of the product by the mark-up value in rands, and then multiply by 100.
- R175 / R75 x 100 = 43%
So, the product has a mark-up percentage of 75%, but a profit margin percentage of 43%.