Markup and margin both describe profit, but they measure it differently, and mixing them up quietly eats your earnings. Here is the difference, with simple examples and a way to price correctly.
The key difference
- Markup is profit as a percentage of your cost.
- Margin is profit as a percentage of your selling price.
Because the selling price is always larger than the cost, margin is always a smaller percentage than markup.
A worked example
You buy a product for 100 and sell it for 150.
- Profit: 150 − 100 = 50
- Markup: 50 ÷ 100 = 50%
- Margin: 50 ÷ 150 = 33.3%
Same sale, two different percentages. Try your own numbers in the markup calculator or the profit margin calculator.
The formulas
- Selling price = cost × (1 + markup)
- Markup = (price − cost) ÷ cost
- Margin = (price − cost) ÷ price
- Price for a target margin = cost ÷ (1 − margin)
The classic pricing mistake
Suppose you want a 40% margin and you add 40% to your cost. A cost of 100 becomes a price of 140, but your actual margin is 40 ÷ 140 = 28.6%, not 40%. To get a true 40% margin you would need a price of 100 ÷ (1 − 0.40) = 166.67, which is a 66.7% markup.
Markup to margin cheat sheet
- 25% markup = 20% margin
- 50% markup = 33.3% margin
- 100% markup = 50% margin
- 150% markup = 60% margin
Which should you use?
Use markup to set prices from costs: it is quick and natural for retailers and contractors who add a percentage to materials. Use margin to judge profitability and to compare against financial targets, since it shows how much of each sale you keep. Many businesses track both.
Remember your overheads
Margin on a product is not the same as profit for the business. Rent, software, insurance, your own time and tax all come out of it. If you sell time, start from your required hourly rate; if you offer sales, check your floor with the discount calculator first.
Showing markup on an invoice
Many clients just want the final price. If you work on a cost-plus basis, you can list materials at cost and add a clearly labelled markup or handling fee. Be transparent about it in your quote so the invoice never surprises anyone.
Frequently asked questions
Can margin be higher than 100%?
No. Margin is a share of the selling price, so it tops out below 100%. Markup can exceed 100%.
Is gross margin the same as profit margin?
Gross margin counts only the direct cost of the product. Net profit margin also subtracts overheads and taxes, so it is lower.
What is a good margin?
It varies widely by industry. Compare with similar businesses and make sure your margin covers your overheads with something left over.
Price your next job with the markup calculator, then put the figures on an invoice.