Profit Margin vs Markup: The Difference and How to Price Correctly

A shopkeeper who "adds 50 percent" to everything and one who "makes a 50 percent margin" are running two very different businesses. Margin and markup both describe profit, but they measure it against different things. Mixing them up is one of the most common and expensive pricing mistakes. This guide makes the difference clear.

Two formulas

• Margin = (price − cost) ÷ price × 100. It is profit as a share of the selling price.
• Markup = (price − cost) ÷ cost × 100. It is profit as a share of the cost.

Take an item that costs $50 and sells for $80. The profit is $30. The margin is 30 ÷ 80 = 37.5 percent. The markup is 30 ÷ 50 = 60 percent. Same sale, two numbers. Markup is always larger than margin, because cost is smaller than price.

The costly confusion

Suppose you want a 50 percent margin and you add a 50 percent markup. You buy for $50 and sell for $75. Your profit is $25, and your margin is 25 ÷ 75 = 33.3 percent. To really earn a 50 percent margin you must sell at $100, which is a 100 percent markup. Businesses that plan on margin but price on markup consistently earn less than they expected.

Converting between them

If you know the margin m (as a decimal), the markup is m ÷ (1 − m). If you know the markup k, the margin is k ÷ (1 + k).

• 20 percent margin = 25 percent markup
• 30 percent margin = 42.9 percent markup
• 40 percent margin = 66.7 percent markup
• 50 percent margin = 100 percent markup
• 60 percent margin = 150 percent markup

Setting a price for a target margin

Divide the cost by (1 − margin). For a 40 percent margin on a $60 cost: 60 ÷ 0.60 = $100. For a 30 percent margin on $50: 50 ÷ 0.70 = $71.43. To set a price from a markup, multiply the cost by (1 + markup): a 60 percent markup on $50 is 50 × 1.60 = $80.

Gross and net margin

There are levels of profit, and each gives a different margin.

• Gross margin uses only the direct cost of the product: materials, direct labour and delivery.
• Operating margin subtracts running costs such as rent, salaries and marketing.
• Net margin subtracts everything, including interest and tax.

A product can have a 60 percent gross margin and the business a 5 percent net margin. Price products using gross margin, but judge the business on net margin. When you use the calculator with total costs, you get net margin.

What discounts do to margin

Discounts hurt more than they look. An item with a 40 percent margin sold at 10 percent off has a margin of 33.3 percent, and at 20 percent off it has 25 percent. To make the same total profit at 20 percent off, you would have to sell noticeably more units. Before you run a sale, work out the margin at the sale price and how many extra sales you need.

Typical margins

Margins vary widely between industries. Grocery retail runs on thin margins with high volume, restaurants on modest ones, while software and consulting can earn far more. Compare your figures with similar businesses, not with a general rule, and remember that a lower margin can still be a good business if it sells in volume.

Use the calculator

The Profit Margin Calculator shows profit, margin and markup together, and can also give you the price for a target margin or markup. The Break-Even Calculator shows the sales needed to cover your costs at that price, the Discount Calculator shows what a sale does to your revenue, and the ROI Calculator helps you judge investments in stock or equipment. If tax is included in your prices, the Sales Tax Calculator separates it from your revenue. For more on the break-even side, see how to calculate the break-even point.