Margin vs markup: the difference and how to convert
Margin and markup measure the same gap between price and cost, but on different bases. Margin is measured on the price; markup on the cost. So, for the same product, markup is always higher than margin, and mixing them up is one of the most common pricing mistakes in retail.
The formulas
Margin = (price − cost) ÷ price · Markup = (price − cost) ÷ cost
To convert: markup = margin ÷ (1 − margin) and margin = markup ÷ (1 + markup). To get the price: price = cost ÷ (1 − margin) or price = cost × (1 + markup).
Example
| Item | Value |
|---|---|
| Product cost | $25.00 |
| Selling price | $40.00 |
| Gross profit | $15.00 |
| Margin | 15 ÷ 40 = 37.5% |
| Markup | 15 ÷ 25 = 60% |
A shop owner who wants “a 40% margin” but adds 40% to cost will sell at $35.00. The real margin is 10 ÷ 35 = 28.6%, well below the plan.
Gross margin is not profit
The margin on this page is gross: it only looks at the product cost. Sales taxes included in the price, commissions, card or marketplace fees and fixed costs still come out of it. To reach a price that leaves real profit, use the pricing and markup calculator, which includes those percentages.
When to use each
Markup is handy for buying and reselling: you simply multiply the cost. Margin is the language of financial statements and targets, because it shows how much of each sale stays in the business. Set your target as a margin and convert it to a markup when you tag prices.