Markup vs Margin: What's the Difference?
Markup and margin both describe the gap between what something costs you and what you sell it for, but they measure that gap against different numbers. Mixing them up is one of the most common and expensive mistakes in small business pricing. Here is the difference, in plain terms.
What is markup?
Markup is the profit measured against your cost. If an item costs you 80 and you sell it for 100, the 20 profit is 25% of the 80 cost, so the markup is 25%.
Markup = (price - cost) / cost x 100
What is margin?
Margin is the same profit measured against your selling price. That same 20 profit is 20% of the 100 price, so the margin is 20%.
Margin = (price - cost) / price x 100
The key difference in one example
Cost 80, price 100, profit 20. The profit never changes, but:
- Against cost (80), it is a 25% markup.
- Against price (100), it is a 20% margin.
Margin is always the smaller number, because the price is always bigger than the cost. This is exactly why the two get confused: a shop owner who wants a 30% margin but sets a 30% markup ends up with less profit than they planned.
Why does confusing them cost money?
Because setting a markup equal to your target margin always undercharges you. Say you want to keep 40% of every sale as margin. If you instead apply a 40% markup to your cost, you only end up with about a 29% margin, missing your target by a wide gap on every single item. Across a year of sales that shortfall is the difference between a healthy business and one that is quietly bleeding. The fix is not to work harder; it is to convert the number correctly before you set your prices.
How do you convert between markup and margin?
You can move between the two without knowing the actual prices:
- Margin from markup: margin = markup / (1 + markup)
- Markup from margin: markup = margin / (1 - margin)
For example, a 25% markup is 0.25 / 1.25 = 0.20, or a 20% margin, which matches our example above. Going the other way, to hit a 40% margin you need a markup of 0.40 / 0.60 = 0.667, a 67% markup. That large gap is exactly why the conversion matters.
How do you price for a target margin?
Work backwards from the margin you want. The formula is: price = cost / (1 - margin). To keep a 40% margin on an item that costs you 80, divide 80 by 0.60, which gives a price of about 133. Check it: the 53 profit is 40% of the 133 price, exactly your target. This one formula is the reliable way to price a product line without accidentally undercharging.
Which should you use?
Use markup when you price up from a known cost, which is how most retail and trade pricing works day to day. A common retail rule of thumb, "keystone" pricing, is simply a 100% markup, doubling the cost, which works out to a 50% margin. Use margin when you report profitability, because investors and accountants think in margins. The safest habit is to state which one you mean every time.
Work it out instantly
Skip the arithmetic with our tools: the Profit Margin Calculator gives margin, profit and markup together, and the Markup Calculator turns a cost and markup into a selling price.
Frequently asked questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup on an 80 cost gives a 120 price and a 33% margin. Markup is measured against cost, margin against the selling price, so the margin is always smaller.
How do I convert markup to margin?
Divide the markup by one plus the markup. A 25% markup is 0.25 / 1.25 = 0.20, which is a 20% margin. To go the other way, markup = margin / (1 - margin).
How do I price for a target margin?
Divide your cost by one minus the margin. For a 40% margin on an 80 cost, price = 80 / 0.60, about 133. The 53 profit is then exactly 40% of the price.
Which should retailers use?
Use markup to set prices from a known cost, and margin to report profitability. Always state which one you mean to avoid undercharging. Keystone pricing, a 100% markup, equals a 50% margin.