Margin and markup are the two most common ways to describe the profit on a sale. They’re built from the same numbers — cost and selling price — and they’re often used interchangeably in conversation. But they measure profit against different bases, and confusing them is one of the most common pricing mistakes in small business.
The definitions
Markup is profit as a percentage of cost. It answers: “How much did I add on top of what I paid?”
Margin (gross margin) is profit as a percentage of the selling price. It answers: “How much of each sales dollar do I keep after paying for the item?”
- Gross Profit
- equals Selling Price − Cost
- Markup
- equals Gross Profit ÷ Cost × 100
- Margin
- equals Gross Profit ÷ Selling Price × 100
The same sale, two percentages
Suppose you buy a product for $40 and sell it for $50. Your gross profit is $10.
- Markup = $10 ÷ $40 = 25%
- Margin = $10 ÷ $50 = 20%
Both are correct. They describe the same $10 from different angles. Because the selling price is larger than the cost whenever you make a profit, margin is always the smaller number.
Where it goes wrong
The trouble starts when a business sets a target in one measure and prices with the other. A common scenario: the owner knows the business needs a 30% gross margin to cover overhead, so they add 30% to the cost of everything.
On a $100 item, that gives a $130 price and $30 profit. But $30 ÷ $130 is a 23.1% margin — almost seven points short of the target. Across a year of sales, that gap can be the difference between profit and loss.
Converting between them
With margin and markup expressed as decimals:
- Markup
- equals Margin ÷ (1 − Margin)
- Margin
- equals Markup ÷ (1 + Markup)
Or use this table:
| Margin | Equivalent markup |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 25% | 33.3% |
| 30% | 42.9% |
| 33.3% | 50% |
| 40% | 66.7% |
| 50% | 100% |
| 60% | 150% |
Pricing from a target margin
If you know the margin you need, you can skip markup entirely and price directly:
- Selling Price
- equals Cost ÷ (1 − Target Margin)
For a $100 cost and a 30% target margin: $100 ÷ 0.70 = $142.86. Check: $42.86 ÷ $142.86 = 30%.
Which should you use?
Use whichever your team understands — but use it consistently, and label it clearly. Many retailers think in markup because it’s easy to apply to a cost. Financial statements and most industry benchmarks use margin, because it ties directly to revenue. If you compare your numbers with an industry report, make sure you’re comparing margin with margin.
Try it yourself with the Profit Margin Calculator (from cost and price) or the Markup Calculator (from cost and markup).
This guide is general information, not financial, tax or legal advice. See our disclaimer.