Margin and markup are two ways to express the same profit, but they are calculated differently. Mixing them up is a common and costly pricing mistake.
Definitions
- Markup is the profit as a percentage of the cost: (price − cost) ÷ cost.
- Margin is the profit as a percentage of the selling price: (price − cost) ÷ price.
Because the price is larger than the cost, margin is always a smaller percentage than markup.
Example
A product costs $60 to make or buy and sells for $100. Profit is $40.
Margin = 40 ÷ 100 = 40%
Conversion table
| Markup | Margin |
|---|---|
| 10% | 9.1% |
| 25% | 20.0% |
| 50% | 33.3% |
| 100% | 50.0% |
| 200% | 66.7% |
To convert, margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin).
The classic pricing mistake
Suppose you want a 30% margin on a $60 cost. If you add 30% to the cost, the price is $78 and the profit is $18, which is only a 23% margin. To actually get 30%, divide the cost by (1 − 0.30): $60 ÷ 0.70 = $85.71.
Which should you use?
- Use margin to judge profitability. It tells you how much of every sales dollar you keep, and it is what accountants and investors usually report.
- Use markup when setting prices from costs, especially in retail, where standard markups are applied to wholesale prices. Just be sure everyone in your business is using the same definition.
Gross margin and net margin
Gross margin looks only at direct costs such as materials or the wholesale price. Net margin also subtracts overhead, wages, marketing, fees and taxes. A product with a healthy gross margin can still lose money once all the costs are included, so track both.
Discounts eat margin quickly
A 20% discount does not reduce your margin by 20 points. On a product with a 40% margin, a 20% discount cuts the price to $80 on a $60 cost, leaving a margin of only 25%. Check the effect with the discount calculator and the profit margin calculator before running a sale.