Markup vs Margin: Two Ways to Measure the Same Profit
A 50% markup is not a 50% margin. Both measure the same profit on a sale, but against different bases, and mixing them up quietly erodes pricing.
Markup and margin both describe the profit on a sale, but they measure it against different numbers. Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Because price is always larger than cost when a sale is profitable, the margin percentage is always the smaller of the two for the same item.
The two formulas
- Profit = selling price - cost
- Markup % = profit ÷ cost × 100
- Margin % = profit ÷ selling price × 100
Take an item that costs 40 and sells for 60. The profit is 20. The markup is 20 ÷ 40 = 50%. The margin is 20 ÷ 60 = 33.3%. Same sale, same 20 of profit, two very different-sounding percentages.
Why the difference matters
The most common pricing slip is adding a markup while believing it delivers the same margin. Suppose an owner wants a 30% margin and adds 30% to cost. An item costing 100 then sells for 130, leaving 30 of profit on a 130 price: a margin of about 23%, not 30%. Across a whole product range, that gap can be the difference between covering overheads and falling short.
It also matters when talking to others. Suppliers, distributors and retailers may quote either figure, and wholesale relationships, such as those described in our article on working with food distributors in the USA, involve several businesses each taking a share between producer and shelf. Always confirm which measure is meant before agreeing a price.
Markup to margin conversion table
| Markup on cost | Equivalent margin on price |
|---|---|
| 20% | 16.7% |
| 25% | 20% |
| 33.3% | 25% |
| 50% | 33.3% |
| 66.7% | 40% |
| 100% | 50% |
| 150% | 60% |
| 200% | 66.7% |
To convert without the table, use decimals:
- margin = markup ÷ (1 + markup) - for example 0.5 ÷ 1.5 = 0.333
- markup = margin ÷ (1 - margin) - for example 0.4 ÷ 0.6 = 0.667
How to price for a target margin
If you know the margin you need, work backwards from cost:
Selling price = cost ÷ (1 - target margin)
For a 40% margin on an item costing 40: 40 ÷ 0.6 = 66.67. Check it: profit is 26.67, and 26.67 ÷ 66.67 = 40%. This approach is more reliable than picking a markup and hoping it lands where you need.
Use the full cost, not just the purchase price
Margins are only as accurate as the cost figure behind them. For physical goods, include everything needed to get the item ready to sell:
- the purchase or production price;
- inbound shipping, duties and handling;
- packaging and labelling - for small custom products, as our guide to designing acrylic keychains shows, presentation can be a real part of the unit cost;
- card or platform fees charged per sale, if you want a true per-item figure.
Gross margin and net margin
Item-level margin feeds into the business-wide gross margin: gross profit divided by revenue. That is the first margin line on a profit and loss statement. Net margin goes further and divides the final net profit, after rent, wages and every other overhead, by revenue. A product can carry a healthy gross margin while the business as a whole earns a thin net margin if overheads are high, which is why pricing decisions should be checked against the full P&L, not just the price tag.
Which one should you use?
- Markup is handy at the point of setting a price, because you start from a known cost.
- Margin is better for planning and reporting, because it connects directly to revenue and to how much of each sale is left to cover overheads.
Many businesses use markup on the shop floor and margin in the accounts. That works, provided everyone knows which is which.
Quick answers
Can margin be more than 100%?
No. Profit can never exceed the selling price, so margin stays below 100%. Markup has no ceiling: an item costing 10 and selling for 50 carries a 400% markup but an 80% margin.
Is a higher markup always better?
Not necessarily. Customers compare prices, and a markup that pushes an item above what the market will pay can reduce total profit through lost sales. Pricing is a balance between margin per unit and the number of units sold.
What margin should a small business aim for?
There is no universal figure; it depends on the sector, overheads and competition. Work out what gross margin your fixed costs require, then test whether your prices deliver it. An accountant can help model this for your situation.
General information, not financial advice. For pricing decisions with significant consequences, talk to an accountant or business adviser.