Margin and markup both describe profit as a percentage, and both start from the same two numbers: what something costs you and what you sell it for. They answer different questions, and confusing them is one of the most common pricing mistakes small businesses make.
The two formulas
- Profit = selling price − cost
- Margin = profit ÷ selling price
- Markup = profit ÷ cost
Margin tells you what share of each sale you keep. Markup tells you how much you added on top of your cost. For the same sale, markup is always the bigger percentage, because cost is always smaller than price.
Profit
$100.00 − $60.00equals$40.00
Margin
$40.00 ÷ $100.00equals40%
Markup
$40.00 ÷ $60.00equals66.67%
Where the mistake happens
Say you want a 50% margin. The tempting move is to add 50% to the cost. On a $60 item, that gives a price of $90. The profit is $30, and $30 ÷ $90 is a 33.33% margin, not 50%.
To actually reach a margin, divide the cost by one minus the margin. For 50%, that is $60 ÷ 0.5, or $120. For a 40% margin, it is $60 ÷ 0.6, or $100.
Wrong: add 50% to cost
$60.00 × 1.5equals$90.00 (33.33% margin)
Right: divide by (1 − margin)
$60.00 ÷ (1 − 50%)equals$120.00
Quick conversions
These pairs describe exactly the same sale:
- 25% markup is a 20% margin
- 50% markup is a 33.33% margin
- 66.67% markup is a 40% margin
- 100% markup is a 50% margin
The general formulas are: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin).
Which one should you use?
Retail and wholesale often talk in markup, because it starts from the cost of stock. Accounts, investors and most business reports use margin, because it shows how much of your revenue turns into profit. Either is fine inside your own pricing, as long as everyone involved knows which one a target refers to.
Tip: Margin can never reach 100%, because that would mean the item cost nothing. If a target margin looks impossible, check whether someone actually meant markup.