Practical guide
Markup vs margin: what's the difference?
Markup and margin both describe profit as a percentage, but they divide by different numbers. Mixing them up is one of the most common pricing mistakes in small businesses, and it quietly costs money on every sale.
The short answer
Markup compares profit with what an item cost you. Margin compares profit with what you sell it for. Because the selling price is always larger than the cost (when you make a profit), the margin percentage is always smaller than the markup percentage for the same item.
Markup = (price − cost) ÷ cost × 100
Margin = (price − cost) ÷ price × 100
A worked example
A shop buys a lamp for $40 and sells it for $60. The profit on each lamp is $60 − $40 = $20. The same $20 gives two very different percentages:
Markup: $20 ÷ $40 = 0.50 → 50% markup
Margin: $20 ÷ $60 = 0.333 → 33.3% margin
Neither number is wrong. They simply answer different questions. Markup tells you how much you added on top of cost. Margin tells you how much of every dollar of sales you keep as gross profit. You can check either figure with the "X is what % of Y" calculator: enter the profit as X and the cost (for markup) or the price (for margin) as Y.
Setting a price from a markup
If you know the markup you want, multiply the cost by one plus the markup as a decimal.
Price = cost × (1 + markup ÷ 100)
Cost $40, 50% markup: $40 × 1.50 = $60.00
Setting a price from a target margin
This is where many people go wrong. To hit a target margin, divide the cost by what is left after the margin. Do not multiply the cost by one plus the margin.
Price = cost ÷ (1 − margin ÷ 100)
Cost $40, 40% target margin: $40 ÷ 0.60 = $66.67
Check: profit $26.67 ÷ price $66.67 = 40% ✓
The tempting shortcut, $40 × 1.40 = $56, gives a profit of $16. Divided by the $56 price, that is only a 28.6% margin, well short of the 40% you planned for. Across hundreds of sales, that gap adds up to real money.
Converting between markup and margin
You can convert directly without knowing the cost or price, as long as you work in decimals (50% = 0.50).
Margin = markup ÷ (1 + markup)
Markup = margin ÷ (1 − margin)
A 25% markup: 0.25 ÷ 1.25 = 0.20 → 20% margin
A 40% margin: 0.40 ÷ 0.60 = 0.667 → 66.7% markup
| Markup | Margin |
|---|---|
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
Notice that markup can go above 100% (selling something for three times its cost is a 200% markup), but margin can never reach 100%. A 100% margin would mean the item cost nothing at all.
How discounts eat into margin
Discounts come straight out of profit, so a small price cut can remove a large share of your margin. Suppose an item costs $60 and normally sells for $100, a 40% margin with $40 profit.
10% sale: new price $90, profit $90 − $60 = $30
New margin: $30 ÷ $90 = 33.3%
Profit per sale fell from $40 to $30, a 25% drop.
In this example you would need to sell about a third more items during the sale just to earn the same total profit. The discounts and sales tax guide covers how sale prices are calculated from the shopper's side.
Which one should you use?
Many retailers and wholesalers talk in markup because it starts from the number they know best: what they paid. Accountants, lenders, and financial statements usually talk in margin, because it relates profit to revenue. Both are useful. The important thing is to label the number clearly so that "50%" is never read as the wrong one.
Keep in mind that both figures here are gross measures. They ignore rent, wages, shipping, card fees, and other running costs, so a healthy-looking gross margin does not guarantee an overall profit. This guide explains the arithmetic only and is not business or accounting advice.