Pricing mistakes often start with two words that sound like they mean the same thing. Markup and margin both describe profit as a percentage, but they measure it against different numbers, and mixing them up quietly eats into your earnings. This guide explains how each one works, how to convert between them and how to use them when you set a price.
The definitions
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Say an item costs you 60 and you sell it for 100. The profit is 40. Markup is 40 divided by 60, which is 66.7%. Margin is 40 divided by 100, which is 40%. It is the same sale described two ways, and both numbers are correct.
Why the difference matters
Suppose you want a 30% margin on a product that costs 70. If you add a 30% markup, you charge 91 and keep 21, which is a margin of only 23.1%. You are almost 7 points short of your target on every sale. To really earn a 30% margin, the price is 70 divided by 0.7, which is 100.
The error is easy to make because most people think in terms of "adding a percentage to cost", and that is markup. Margin is what appears in financial reports and what banks, investors and accountants talk about, so it helps to be comfortable with both.
The formulas
- Markup % = (price − cost) ÷ cost × 100
- Margin % = (price − cost) ÷ price × 100
- Price from a markup = cost × (1 + markup ÷ 100)
- Price from a margin = cost ÷ (1 − margin ÷ 100)
Converting between them
Markup = margin ÷ (100 − margin) × 100, and margin = markup ÷ (100 + markup) × 100. A few common pairs: a 20% margin is a 25% markup, 25% is 33.3%, 30% is 42.9%, 40% is 66.7%, and a 50% margin is a 100% markup. The gap widens as the numbers rise. A 50% margin means you sell at double the cost, which is exactly a 100% markup.
Which one should you use?
For turning a supplier cost into a price, markup is convenient: cost times a multiplier. For judging how healthy the business is, margin is the better yardstick, because it tells you how much of each sale you keep. Use whichever you prefer day to day, but convert to margin when you compare products, quote a client or read a report.
Count all of your costs
The profit you calculate is only as good as the cost behind it. Include the purchase price, inbound freight, import duties, packaging and any per-unit fees. If you sell through a marketplace that takes a percentage of the price, include that too. With a cost of 40, a target margin of 25% and a platform fee of 12% of the sale price, the price is 40 ÷ (1 − 0.25 − 0.12), which is 63.49. Leave out the fee and you would charge 53.33 and end up with a far thinner margin than you planned.
What discounts do to margin
Take the earlier example of a cost of 60 and a price of 100, which is a 40% margin. A 20% discount brings the price to 80. Profit falls from 40 to 20 and the margin to 25%. Profit per unit has halved, which means you need to sell twice as many units to make the same gross profit. Before running a sale, work out the margin at the sale price and the extra volume you would need. Our discount calculator shows the sale price quickly.
A worked example: pricing an imported product
Say you buy 200 units at 18.50 each. That is 3,700.00 for the goods. Shipping to your warehouse costs 160, and import duty at 5% adds 185.00. Your landed cost is 4,045.00, or 20.23 per unit, which is noticeably more than the 18.50 on the supplier's invoice.
You want a 35% margin. The price is 20.23 ÷ 0.65, which comes to 31.12. Rounding up to a shelf price of 31.99 gives a profit of 11.76 per unit and a margin of 36.8%. If you then run a 15% promotion, the price drops to 27.19 and the margin to 25.6%. That is still profitable, but you have given up more than ten points of margin, and you would want the promotion to bring in noticeably more volume to justify it.
Across all 200 units at 31.99, gross profit is about 2,353. That figure still has to cover your storage, software, advertising and your own time, which is why gross margin on its own never tells the whole story.
Questions people often ask
Is a high markup always better? Not necessarily. A high markup that prices you out of the market sells nothing. The right level is the highest price customers will pay while still buying, and above the minimum you need to cover costs and make a profit.
Can margin ever be 100%? No. Margin is profit divided by price, so it can approach but never reach 100%. Markup, on the other hand, can go well over 100%, since it is measured against cost.
Which should I put on an invoice? Neither. Customers see the price. Markup and margin are internal numbers for your own pricing and reporting.
Margin is not the same as net profit
The margin in this guide is gross margin. It ignores rent, wages, software and other running costs, so a product with a 40% margin can still lose money if the business has high overheads. To see how many sales you need to cover those costs, use our break-even calculator.
A routine for pricing a product
Start with the full cost per unit, including freight, duties, packaging and fees. Decide the margin you need after overheads. Work out the price from that margin, then compare it with what similar products sell for. Test the price again after a typical discount to make sure the margin still works. Finally, revisit it whenever your costs, exchange rates or competitors change, because a price that was right six months ago may not be today.
Try it yourself
Our markup calculator shows the price, the profit and the margin from a cost and a markup, and the retail price calculator works backwards from the margin you want. This guide is general information, not financial advice.
