The formulas
Margin = profit ÷ selling price × 100
Markup = profit ÷ cost × 100
Price for a target margin = cost ÷ (1 − margin)
Margin versus markup
These two are often confused, but they measure profit against different things. Margin compares profit with the selling price. Markup compares profit with the cost. For an item that costs $60 and sells for $100, profit is $40, so the margin is 40% and the markup is 66.7%.
Markup is always the bigger number, and the gap widens as profits rise. Here is how common markups translate:
| Markup | Margin |
|---|---|
| 25% | 20.0% |
| 50% | 33.3% |
| 100% | 50.0% |
Pricing for a target margin
If you want a 30% margin on a $60 cost, dividing by (1 − 0.30) gives a price of about $85.71. A common mistake is to add 30% to the cost instead, which would give $78 and a margin of only 23%. Decide which measure you are targeting before you set prices.
Gross margin and net margin
This calculator uses the cost you enter, so the result is a gross margin if the cost is only the product cost. Net margin also subtracts overhead such as rent, wages, marketing, shipping and fees, and is the number that tells you what the business really keeps. Include every cost that belongs to the sale if you want a true picture of profitability.