Markup vs margin: the difference, the formulas and a conversion table

The two formulas

Markup % = (price − cost) ÷ cost

Margin % = (price − cost) ÷ price

The numerator is the same: the gross profit per unit, $16 in the example. Only the denominator changes. Because the price is always higher than the cost when you make a profit, the margin is always the smaller of the two percentages. A margin can never reach 100%, while a markup can be any size: a 300% markup is perfectly possible.

Margin here means gross margin: price minus the cost of the goods. It is not the net profit margin of the business, which also pays rent, wages and taxes out of that gross profit.

Converting markup to margin and back

Margin = markup ÷ (1 + markup)

Markup = margin ÷ (1 − margin)

In the example: 66.67% ÷ 1.6667 = 40%, and 40% ÷ 0.60 = 66.67%. A few conversions are worth knowing by heart: a 25% markup is a 20% margin, a 50% markup is a 33.3% margin, and a 100% markup, doubling the cost, is a 50% margin. Retailers call that last one keystone pricing.

Pricing from a target margin

Most businesses plan in margins, because a margin applies directly to sales: a 45% margin on $100,000 of sales is $45,000 of gross profit. To hit a target margin, divide:

Price = cost ÷ (1 − target margin)

For the lamp: $24 ÷ (1 − 45%) = $43.64. The tempting shortcut, $24 × 1.45 = $34.80, adds a 45% markup and leaves a margin of only 31.03%. On every unit the business earns $10.80 instead of $19.64, and nobody notices until the quarterly numbers come in.

Worked example: one product and a conversion table

Rows 2 to 12 calculate both percentages for one product and price it from a target margin. Rows 15 to 22 are a conversion table: type any margin in column A and the markup and price follow. The product is fictional.

Worked example: one product and a conversion table

	A	B	C
1	Desk lamp	Value
2	Cost per unit ($)	24.00
3	Selling price, net of tax ($)	40.00
4	Gross profit per unit ($)	16.00
5	Markup % (profit ÷ cost)	66.67%
6	Margin % (profit ÷ price)	40.00%
7	Margin from markup	40.00%
8	Markup from margin	66.67%
9	Target margin	45%
10	Price for the target margin ($)	43.64
11	Wrong: cost × (1 + target) ($)	34.80
12	Margin you actually get	31.03%
13
14	Target margin	Markup needed	Price on a $24 cost
15	10%	11.1%	26.67
16	20%	25.0%	30.00
17	25%	33.3%	32.00
18	30%	42.9%	34.29
19	40%	66.7%	40.00
20	50%	100.0%	48.00
21	60%	150.0%	60.00
22	75%	300.0%	96.00

Who uses which

The words are not used consistently, so always ask which base is meant.

• Retailers usually quote markup on retail, which is the same calculation as margin: (retail − cost) ÷ retail. A buyer's "56% markup" is a 56% margin, or a 127% markup on cost.
• Suppliers, manufacturers and many small shops quote markup on cost.
• Contractors price a job as cost × (1 + markup) for overhead and profit. A 15% markup gives only a 13.04% margin, which matters when the company's overhead alone is 10% of revenue.
• Restaurants turn it around and talk about food cost %, which is 1 − margin on the plate. The food cost percentage guide works through it.

Discounts eat margin faster than you think

A 20% discount on the $40 lamp brings the price to $32. The margin falls from 40% to ($32 − $24) ÷ $32 = 25%, and the profit per unit halves from $16 to $8. To earn the same gross profit, the store now has to sell twice as many lamps. Always recompute the margin from the actual selling price and cost after a discount, and see the break-even analysis guide for the volume a lower price needs.

Common mistakes

• Multiplying the cost by (1 + target margin). That adds a markup and undershoots the margin. Divide by (1 − margin) instead.
• Comparing a markup with a margin. A supplier's 50% and a retailer's 50% can be very different numbers. Check the base before comparing.
• Subtracting a discount from the margin percentage. A 20% discount does not turn a 40% margin into 20%. Recompute it from the new price: it is 25%.
• Using the price with sales tax or VAT. Tax collected is not revenue, so it inflates both markup and margin.
• Leaving freight and duties out of the cost. Use the landed cost, including shipping, duties and packaging, or every percentage looks better than it is.