Margin and markup: the same profit, divided by different things
Both describe the profit on a sale. Margin is the profit as a share of the selling price. Markup is the same profit as a share of the cost. Because the price is bigger than the cost, the margin is always the smaller number.
Take an item that costs 80 and sells for 100. The profit is 20. Margin = 20 ÷ 100 = 20%. Markup = 20 ÷ 80 = 25%. Same sale, two correct answers, and mixing them up is how prices end up too low.
The two convert with simple rules: margin = markup ÷ (1 + markup) and markup = margin ÷ (1 − margin), with the percentages written as decimals. Some pairs worth knowing:
- 10% markup is a 9.09% margin, and a 10% margin needs an 11.11% markup.
- 25% markup is a 20% margin, and a 25% margin needs a 33.33% markup.
- 50% markup is a 33.33% margin, and a 50% margin needs a 100% markup.
- 100% markup (doubling the cost) is a 50% margin, and a 75% margin needs a 300% markup.
If you are after a margin, use this page. If you set prices by adding a percentage to the cost, the markup calculator leads with that number instead.
How to price for a target margin
To earn a margin m on a cost, divide the cost by what is left after the margin: price = cost ÷ (1 − m). A 40% margin means the cost is 60% of the price, so a cost of 60 gives a price of 60 ÷ 0.6 = 100.
The common mistake is to multiply the cost by 1.4 instead. That is a 40% markup, and it gives a price of 84 with a margin of only 28.57%. To check a price you have already set, enter the cost and the price under Cost and price.
Working the other way, cost = price × (1 − m) tells you the most you can pay for something and still keep the margin you want. At a price of 100 and a 40% margin, the cost has to be 60 or less.
Gross margin, and why discounts hurt it
This calculator gives gross margin: the profit left after the direct cost of the item, before rent, wages, marketing and tax. Net margin takes all of those off as well, so it is smaller. Use your own accounts for net margin.
Discounts take a bigger bite out of margin than they seem to. An item that costs 80 and sells for 100 has a 20% margin. Take 10% off the price and it sells for 90, so the profit falls from 20 to 10 and the margin to 11.11%. A 10% discount cut the margin almost in half.