Markup and margin both describe the gap between what something costs you and what you sell it for. They use the same two numbers, but they express that gap as a percentage of different bases, so the percentages are never the same. Mixing them up is one of the most common and costly pricing errors in small business. This guide explains each, shows how to convert between them, and explains when to use which.
The definitions
Both start with gross profit per unit: selling price minus cost.
Markup % = Gross profit ÷ Cost × 100
Margin % = Gross profit ÷ Price × 100
Markup answers: how much did I add on top of my cost? Margin answers: what share of each sale do I keep after paying for the product?
Because price is always larger than cost when you make a profit, margin is always the smaller percentage.
A simple example
You buy a product for $40 and sell it for $60. Gross profit is $20.
- Markup = $20 ÷ $40 = 50%
- Margin = $20 ÷ $60 = 33.3%
Same product, same profit, two very different-looking percentages.
Why the confusion is expensive
Suppose you know your business needs a 40% gross margin to cover rent, wages and other overhead. If you price by adding a 40% markup to cost, you won't get there:
- Cost $40 + 40% markup = $56 price
- Margin = $16 ÷ $56 = 28.6%
On $200,000 of sales, the gap between a 40% margin and a 28.6% margin is about $22,800 of gross profit. That can be the difference between a profitable year and a losing one, and nothing in the day-to-day numbers looks wrong.
The reverse mistake happens too. A supplier or retailer quoting a margin may be heard as a markup, which makes the deal look worse than it is.
Converting between markup and margin
Markup = Margin ÷ (1 − Margin)
(Use decimals: 50% = 0.5.)
| Markup | Margin |
|---|---|
| 20% | 16.7% |
| 25% | 20.0% |
| 33.3% | 25.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
| 150% | 60.0% |
| 200% | 66.7% |
| 300% | 75.0% |
A few things stand out. Markup can be any positive number: 300%, 500%, even more. Margin can never reach 100%, because that would mean the product cost nothing. And as markups get large, margin rises more and more slowly.
Setting a price from a target margin
If you know the margin you need, calculate price directly:
For a $40 cost and a 40% target margin: $40 ÷ 0.60 = $66.67. Check it: ($66.67 − $40) ÷ $66.67 = 40%. You can do this instantly with the markup and margin calculator by choosing "Target margin %".
When to use markup
- Building prices from cost. Retailers and wholesalers often use standard markups by product category because they're easy to apply to an invoice cost.
- Quoting jobs. Contractors often add a markup to materials and subcontractor costs.
- Talking about keystone pricing. Keystone means doubling the cost, a 100% markup, which gives a 50% margin.
When to use margin
- Financial statements. Gross margin on an income statement is gross profit divided by revenue. Lenders, investors and accountants talk in margins.
- Planning and budgeting. Margin tells you directly how much of each sales dollar is available to cover overhead. If overhead is 30% of sales, you need a gross margin above 30% to make a profit.
- Comparing products. Margins on different products can be compared and averaged on a sales basis, which is more useful for understanding the business as a whole.
Gross margin vs. other margins
The margin discussed here is gross margin: it only subtracts the direct cost of the product. Your business also has operating margin (after overhead like rent and salaries) and net margin (after everything, including interest and taxes). A healthy gross margin can still produce a loss if overhead is too high. The profit margin calculator shows all three from your revenue and costs.
A practical workflow
- From your budget, work out the gross margin you need to cover overhead and leave a profit.
- Convert that margin into a markup if your team prices from cost, and write it down so everyone uses the same number.
- Calculate prices from cost, then round to sensible price points.
- Check actual gross margin each month in your bookkeeping. If it's below target, look for cost increases, discounts or a shift toward low-margin products.
Quick reference
- Markup is based on cost; margin is based on price.
- For the same product, margin is always lower than markup.
- A 50% markup is a 33.3% margin. A 100% markup is a 50% margin.
- Price for a target margin = Cost ÷ (1 − Margin).
Pick one language for your business, convert carefully when talking to suppliers or customers who use the other, and you'll avoid one of the quietest profit leaks in small business. For a full pricing method, see how to price a product.