The difference in one sentence
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Same dollars, different base. Because the price is always bigger than the cost, the markup percentage is always bigger than the margin percentage for the same product.
Take a bag of coffee beans that costs you $12 and sells for $18. The profit is $6. As a markup that is 6 ÷ 12 = 50%. As a margin it is 6 ÷ 18 = 33.3%. Both numbers are right. They answer different questions: "how much did I add to the cost?" and "how much of each dollar I take in is profit?"
The formulas
Write percentages as decimals in these formulas: 50% is 0.5, 150% is 1.5. The two conversion formulas are the ones to memorize.
Check with the coffee: markup 0.5 ÷ 1.5 = 0.333, so a 50% markup is a 33.3% margin. The other way, 0.333 ÷ 0.667 = 0.5. The markup calculator and the profit margin calculator run these formulas in every direction, so you can enter any two of cost, price, markup and margin and get the rest.
Markup to margin conversion table
Find your markup in the first column and read the margin it actually gives you. The last column shows the selling price for something that costs you $10.
| Markup | Margin | Price for a $10 cost | Profit |
|---|---|---|---|
| 10% | 9.1% | $11.00 | $1.00 |
| 15% | 13.0% | $11.50 | $1.50 |
| 20% | 16.7% | $12.00 | $2.00 |
| 25% | 20% | $12.50 | $2.50 |
| 30% | 23.1% | $13.00 | $3.00 |
| 40% | 28.6% | $14.00 | $4.00 |
| 50% | 33.3% | $15.00 | $5.00 |
| 60% | 37.5% | $16.00 | $6.00 |
| 75% | 42.9% | $17.50 | $7.50 |
| 100% | 50% | $20.00 | $10.00 |
| 150% | 60% | $25.00 | $15.00 |
| 200% | 66.7% | $30.00 | $20.00 |
| 300% | 75% | $40.00 | $30.00 |
Two rows are worth remembering. A 25% markup is a 20% margin, and a 100% markup is a 50% margin. Everything in between follows the same curve: the margin climbs slower and slower as the markup grows, and it never reaches 100%.
Worked examples
Pricing for a target margin
Your plan says every product needs a 40% gross margin. A phone case costs you $9. Price = 9 ÷ (1 − 0.4) = $15. Check: profit $6, and 6 ÷ 15 = 40%. If you had added a 40% markup instead, the price would be $12.60, the profit $3.60 and the margin only 28.6%. On 1,000 cases that is $2,400 of gross profit you planned for and never earned.
Reading a markup someone quotes you
A supplier says their retailers "work with a 60% markup" on a $25 wholesale item. That means a $40 shelf price and a $15 profit, which is a 37.5% margin. If your shop needs 45% to cover its costs, that product is not for you at that wholesale price, however normal the markup sounds.
Discounts eat margin faster than you think
You price a $50 cost item with a 50% markup at $75, a 33.3% margin. A 20% sale takes the price to $60. The profit drops from $25 to $10, so the markup is now 20% and the margin 16.7%. The discount was 20% of the price, but it removed 60% of the profit.
Markup and the break-even point
Margin also tells you how many units cover your fixed costs. With a $15 price, a $9 cost and $3,000 of monthly fixed costs, each case contributes $6, so you break even at 3,000 ÷ 6 = 500 cases a month. The break-even calculator does this with a chart; move the price and watch the number change.
Commissions come out of the margin
If a salesperson earns 10% of revenue on the $15 case, that is $1.50 per unit, and your gross profit after commission falls from $6 to $4.50, a 30% margin instead of 40%. Pay commission on gross profit instead and the same $1.50 would need a 25% rate. The commission calculator compares flat, tiered and base-plus-commission plans.
Common mistakes
- Treating a markup percentage as a margin. The most expensive one. A "50% markup" is a 33.3% margin. Convert before you compare it with anything in your budget.
- Expecting a margin above 100%. Margin is profit divided by price, and profit is never more than the price. If a spreadsheet shows a 150% margin, it is computing a markup.
- Forgetting what gross means. Gross margin takes only the cost of the goods out of revenue (Wikipedia). Rent, salaries, fees and ads come out afterwards. A 40% gross margin can be a 5% net margin.
- Costing the product without the extras. Shipping in, packaging, payment fees and returns are part of the cost. Leave them out and both your markup and your margin are overstated.
- Discounting from the markup, not from the margin. As the example shows, a 20% discount on a 50% markup halves the margin. Set the deepest discount you can afford from the margin side first.
Which one should you use?
Use markup to set prices quickly: cost times a fixed factor, done. Use margin to judge the business: it is the number that tells you how much of every dollar you take in is left to pay for everything that is not the product. A simple routine does both. Decide the margin you need once, convert it to a markup factor with markup = margin ÷ (1 − margin), and apply that factor to every new cost price. For a 40% margin the factor is 1.667; for 50% it is 2; for 60% it is 2.5.
A quick check for any quote
When someone gives you a percentage without saying which one, test it against the numbers. Profit divided by cost is a markup. Profit divided by price is a margin. The margin is always the smaller of the two, and it can never reach 100%. If a "margin" of 120% shows up, it is a markup. And if a markup and a margin are quoted as equal, one of them is wrong, because for any profit above zero the two differ.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on a $40 cost gives a $60 price and a $20 profit, which is 33.3% of the price, so the margin is 33.3%. For a 50% margin you need a 100% markup: $40 × 2 = $80.
Can margin be more than 100%?
No. Margin is profit divided by price, and profit can never be more than the price, so margin tops out just below 100%. Markup has no ceiling: a $1 item sold for $5 has a 400% markup and an 80% margin.
Which number should I use to set prices?
Start from the margin your business needs to cover rent, salaries and your own pay, then convert it to a markup with markup = margin ÷ (1 − margin). Apply that markup to each cost. The markup is the shortcut; the margin is the goal.
Is gross margin the same as profit margin?
Gross margin is revenue minus the cost of goods sold, divided by revenue, so it ignores rent, salaries and marketing. Net profit margin takes all costs out first. When someone says "margin" about a single product, they usually mean gross margin.
What is keystone pricing?
Doubling the wholesale cost. That is a 100% markup and a 50% gross margin. A $15 wholesale scarf sells for $30 with $15 of gross profit.